Problem:

Hicks Health Clubs, Inc., expects to generate an annual EBIT of $500,000 and needs to obtain financing for $1,000,000 of assets. Their tax bracket is 40%. If the firm goes with a short-term financing plan, their rate will be 8 percent, and with a long-term financing plan their rate will be 9 percent.

Required:

Question: What much more or less will their initial annual earnings after taxes be if they choose the most aggressive financing plan?

1) $10,000

2) ($10,000)

3) ($6,000)

4) $6,000

Note: Please provide equation and explain comprehensively and give step by step solution.