Reference no: EM132623662

Fly UVU is a fairly new regional carrier. They have managed an EBIT of $750,000 for the past two years and are looking at expanding their services. However between the cost of new planes and operating at new airports they would need to generate an additional $1,000,000 through a loan. Use the following information to help them analyze the tax benefit of the loan.

1. Assume an interest rate of 8%. Also, at $500,000 EBIT, use a base bracket of $335,000, a base tax of $113,900, and a marginal rate of 34%.

Problem 1: The $1,000,000 loan should allow Fly UVU the opportunity to expand the business. Additionally, there is a tax benefit received from the interest on the loan. For both of these reasons, the EBIT should increase. Discuss Fly UVU's options and consider whether they should take out the loan. How much would their EBIT need to increase in order to cover the expense of the loan? Should they consider taking out the loan even if their EBIT might not increase immediately? Consider different reasons why they would or would not decide to expand.