With its current leverage, Impi Corporation will have net income next year of $4

Question

With its current leverage, Impi Corporation will have net income next year of $4.5 million. If Impi's corporate tax rate is 35%, and it pays 8% interest on its debt, how much debt can Impi issue this year and still receive the benefit of the interest tax shield next year? With its current leverage, Impi Corporation will have net income next year of $4.5 million. If Impi's corporate tax rate is 35%, and it pays 8% interest on its debt, how much debt can Impi issue this year and still receive the benefit of the interest tax shield next year?

Explanation / Answer

Net income after tax = $4.5 million

Tax rate = 35%

Taxable income = $4.5 million / (1 - 0.35) = $6.923 million

Thus, Impi corporation can increase itss interest expense by $6.923 million

Debt that can issued = $6.923 million / 0.08 = $86.54 million

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