With its current​ leverage, 

ImpiImpi 

Corporation will have net income next year of 

$ 6.500$6.500 

million. If 

ImpiImpi​'s 

corporate tax rate is 

21 %21% 

and it pays 

7 %7% 

interest on its​ debt, how much debt can 

ImpiImpi 

issue this year and still receive the benefit of the interest tax shield next​ year?

Question content area bottom

Part 1

The debt is 

​$enter your response here 

million. ** ​(Round to three decimal​ places.)

To determine how much debt **Impi Corporation** can issue and still benefit from the **interest tax shield**, we use the following formula for the **interest tax shield**:

\[
\text{Interest Tax Shield} = \text{Interest Payment} \times \text{Tax Rate}
\]

Where:

- **Interest Payment** is calculated as $ \text{Debt} \times \text{Interest Rate} $.
- The **corporate tax rate** is 21%.
- The **interest rate** on debt is 7%.

Since Impi Corporation will receive the benefit of the tax shield, we want the interest payment to be deductible, meaning the interest expense should not exceed the amount of **net income** before taxes.

Let’s break it down step by step:

### Step 1: Calculate the net income before taxes
Net income of $6.5 million is after-tax income. To find the income before taxes:

\[
\text{Income Before Taxes} = \frac{\text{Net Income}}{1 - \text{Tax Rate}} = \frac{6.5 \text{ million}}{1 - 0.21} = \frac{6.5}{0.79}
\]

### Step 2: Calculate the maximum allowable interest payment
Since the interest on debt is deductible, we want the maximum interest payment such that it’s equal to or less than the income before taxes.

\[
\text{Interest Payment} = \text{Debt} \times 0.07
\]

Now, we need to calculate the maximum debt based on this condition. I will compute the above values to find the debt amount.The maximum amount of debt that **Impi Corporation** can issue this year and still receive the benefit of the interest tax shield next year is approximately **$117.541 million**.

Would you like more details on this, or do you have any other questions?

Here are 5 related questions to expand this topic:
1. How does the interest tax shield benefit a corporation?
2. What happens if the interest expense exceeds the pre-tax income?
3. How would changes in the corporate tax rate affect the maximum debt?
4. Can a company’s debt level impact its overall cost of capital?
5. How would a change in interest rates impact Impi's interest tax shield?

**Tip**: Always compare the benefits of additional debt against the potential risk of financial distress.

With its current leverage, Impi Corporation will have net income next year of $6.500 million. If Impi's corporate tax rate is 21% and it pays 7% interest on its debt, how much debt can Impi issue this year and still receive the benefit of the interest tax shield next year? (Round to three decimal places.)

Discover how to calculate the maximum debt Impi Corporation can issue and still benefit from the interest tax shield. Using a 7% interest rate, a 21% corporate tax rate, and $6.5 million net income, this step-by-step guide covers tax shields, interest payments, and corporate finance principles.

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