Question

Stephen Colbert (SC) Corporation will have a net income next year of $16.00 million. a. If...

Stephen Colbert (SC) Corporation will have a net income next year of $16.00 million.

a. If SC corporation tax is 35% and it pays 5% interest on its debt, how much additional debt can SC issue this year and still receive the benefit of the interest tax shield next year? (Show your calculations)

b. If SC corporation tax is 20% and it pays 5% interest on its debt, how much additional debt can SC issue this year and still receive the benefit of the interest tax shield next year? (Show your calculations)

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Answer #1
Answer a
Profit before tax = Net Income / (1 - Tax rate) = $16 million / (1-0.35) = $24,62 million
Additional debt SC can issue = Profit before tax / Interest rate on debt = $24.62 million / 5% = $492.31 million
Answer b
Profit before tax = Net Income / (1 - Tax rate) = $16 million / (1-0.20) = $20 million
Additional debt SC can issue = Profit before tax / Interest rate on debt = $20 million / 5% = $400 million
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