Hicks Health Clubs, Inc., expects to generate an annual EBIT of $750,000 and needs to obtain financing for $1,200,000 of assets. Their tax bracket is 40%. If the firm goes with a short-term financing plan, their rate will be 7.5 percent, and with a long-term financing plan their rate will be 9 percent. By how much will their earnings after tax change if they choose the more aggressive financing plan instead of the more conservative?

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The more aggressive financing plan will result in higher interest expenses, which will reduce the earnings before tax. The reduction in earnings before tax will lead to a reduction in earnings after tax. The amount of the reduction in earnings after tax can be calculated as follows:Interest expense with short-term financing = $1,200,000 * 7.5% = $90,000Interest expense with long-term financing = $1,200,000 * 9% = $108,000Reduction in earnings before tax = $108,000 - $90,000 = $18,000Reduction in earnings after tax = $18,000 * (1 - 40%) = $10,800