MassBike’s corporation is currently unlevered, has equity valued at $4.25 million, and has earnings before interest and tax of $1.25 million. In order to save on taxes, MassBike’s CEO suggests that the firm should issue debt and use the proceeds to retire shares of stock. The capital structure change results in $1.20 million of new debt with an annual interest expense of 8 percent. How much in taxes will MassBike save, per year, as a result of the decision to issue debt? Use a corporate tax rate of 34 percent.1. $32,6402. $408,0003. $56,0004. $642,3505. $52,420
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