The benefits of debt: Packman Corporation has a reported EBIT of $500, which is expected to remain constant in perpetuity. If the firm borrows $2,000, its YTM will be 6.5% and its coupon rate will be 8%. If the company's marginal tax rate is 30% and its average tax rate is 20%, what are its after-tax earnings?

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The correct answer is A because the after-tax earnings are $238. The interest expense is $2,000 * 6.5% = $130. The tax savings from the interest expense is $130 * 30% = $39. The after-tax interest expense is $130 - $39 = $91. The after-tax earnings are $500 - $91 = $238.

The Benefits of Debt: Packman Corporation Has a Reported EBIT