Answer to Question #182195 in Economics for Temmi Lee

Question

Legend is a firm with $250 million in assets and no debt financing. The shareholders of Legend have convinced management to lever its assets by issuing $75 million in debt at 8% interest, and using the $75 million proceeds from the debt to repurchases that same amount of equity. The corporate tax rate is 31%. How much will Legend save in taxes, per year, after the debt issue?

Select one:

Answer 1

$$250\times0.31=77.5$$

$$75\times0.08=6$$

$$75\times0.31=23.25$$

$$23.25-6=17.25$$