PDQ, Inc., expects EBIT to be approximately $132 million per year for the forese

Question

PDQ, Inc., expects EBIT to be approximately $132 million per year for the foreseeable future, and it has 50,000 20-year, 8 percent annual coupon bonds outstanding. (Use Table 11.1) What would the appropriate tax rate be for use in the calculation of the debt component of PDQ's WACC? (Round your answer to 2 decimal places.) Tax rate 34 % | ()(s) M http://lectures.mhhe.com..c|| Mlectures.mhhe.com File Edit View Favorites Tools Help Hints References eBookl table 11.1 | Corporate Tax Rates Taxable Income Tax Rate Hint#1 $o 50,001 75.001 100,001 335.001 10,000,0011 15,000,00118,333.333 18.333.334 + $50,000 -75.000 -100,000 335.00o 15% 25 34 39 34 35 38 35 Hint#3 Hint#4 Hint#5 10,0o0,000 115,000,000 Check my work

Explanation / Answer

EBIT $   13,200,000.00 Interest = 50000*1000*8% = $     4,000,000.00 EBT $     9,200,000.00 Tax rate from 9200000 to 10000000 = 34% Tax rate from 10000001 to 13200000 = 35% The tax saved on account of the interest expense is = 800000*34%+3200000*35% = $           1,392,000 Weighted average rate of tax on the interest expense = 1392000/4000000 = 34.80% Answer

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