PMF, Inc., can deduct interest expenses next year up to 30% of EBIT. This limit is equally likely to be $ 18 million, $ 23million, or $ 28 million. Its corporate tax rate is 30 %, and investors pay a 25 % tax rate on income from equity and a 35 % tax rate on interest income.
a. What is the effective tax advantage of debt if PMF has interest expenses of $14 million this coming year?
b. What is the effective tax advantage of debt for interest expenses in excess of $ 28 million? (Ignore carryforwards).
c. What is the expected effective tax advantage of debt for interest expenses between $ 18 million and $ 23 million? (Ignorecarryforwards).
d. What level of interest expense provides PMF with the greatest tax benefit
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