1) Hemingway Corporation is allowing for expanding its operations to increase its income, but before making the final decision they have asked you to compute the corporate tax consequences of their decision. Presently Hemingway produces before-tax yearly income of= $200,000 and has no debt outstanding. Increasing operations would permit Hemingway to rise before-tax yearly income to $350,000. Hemingway can utilize either cash reserves or debt to finance its expansion. If Hemingway uses debt, it will have yearly interest expense of= $70,000.
Make a spreadsheet in Excel to conduct a tax analysis for Hemingway Corporation and find out the following:
i) Determine Hemingway's present annual corporate tax liability?
ii) Determine Hemingway's present average tax rate?
iii) If Hemingway finances its expansion by using cash reserves, determine its new corporate tax liability and average tax rate?
iv) If Hemingway finances its expansion using debt, determine its new corporate tax liability and average tax rate?
v) What would you suggest that firm do? describe why?