A $20 Million Project Is Expected to Return $23 Million

question 40

Multiple Choice

A $20 million project is expected to return $23 million next year. Your firm is in a 40% combined federal and state marginal income tax bracket. You finance the project with $10 million in debt at a rate of 8%.
-Refer to the information above. What amount do you save in taxes by using debt instead of cash to finance the project?

• A)$480,000
• B)$800,000
• C)$80,000
• D)$320,000

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Definitions:

Stockholders' Equity

The portion of a company's capital that comes from the investment of its shareholders, represented by the shares issued to them.

Profitability

The degree to which a company or business activity makes a profit, typically measured over a specific period of time.

Leverage

The use of borrowed funds to increase the potential return of an investment.

Solvency

A measure of a company's ability to meet its long-term financial obligations, reflecting its financial stability and health.