Hicks Health Clubs, Inc., expects to generate an annual EBIT of $750,000 and needs to obtain financing for $1,200,000 of assets. The company's tax bracket is 40%. If the firm uses short-term debt, its rate will be 7.5%, and if it uses long-term debt, its rate will be 9%. By how much will earnings after taxes change if the company chooses the more conservative financing plan instead of the more aggressive plan?

Question

Quizplus · Accepted Answer

Change in EAT = (difference in interest rates) × (assets) × (1 − t)
= −(0.015 × $1,200,000 × 0.6)
= ($10,800)