Empire Industries forecasts net income this coming year as shown below (in thousands of dollars): EBIT $1,000 Interest expense 0
Income before tax $1,000 Taxes -350 Net income $ 650
Approximately $250,000 of Empire's earnings wil be needed to make new positive NPV vestments. Unfortunately Empire's managers are expected to waste and other expenditures that do not contribute to the firm. Al remaining income will be distributed to shareholders. a. What are the two benefits of debt financing for Empire? b. By how much would each $1 of interest expense reduce Empire's distributions to shareholders? c. What is the increase in the total funds Empire will pay to investors for each $1 of interest expense?
