Question

P1-11 Hemingway Corporation is considering expanding its operations to boost its income, but before making a final decision, it has asked you to calculate the corpo- rate tax consequences of such a decision. Currently, Hemingway generates before tax yearly income of $200,000 and has no debt outstanding. Expanding operations

Answer 1

Answer:- a calculation of current corporate tase liability of Meming way corporation is i Tax liability = current year's profit X Rate of corporatetan $ 2,00,000 X 217 - $ 42,000 Nate: Rate applicable is the rate for corporate tax. applicable in u.s. - 1 (6) current average tare scate of Corporation is 21% Hemingway (c) If Hemingway Finance its expansion lusens cash resense, then new corporate tase liability will be :- Taxe liability = New profit & Rate of corporate Tar Tuxe Ga.= $ 3,50.000 X 21%. Taxe lia. =$73,500 Tax rate = 21%

(d) If Hemingway debt thens, new Finance its expansion using corporate Tax liability : Prefit (when expansion throughe debt) = tan - - $3.50,cro - Tonterest esep. Profit - $ 30,000 -$7oUJO = $ 2,80, oro Tuse liability = $2,8orrox 21% Taxe liability = 458.900 Cos (e) Firm should do to finance its expansion thorousle cash reserre because finance thereuse Debt increase the Interest liability by $70,000 and also decrease Tase ciability bet cash reserree pooride better benefit to Hemensway corporation.