Problem:
Hicks Health Clubs, Inc., expects to generate an annual EBIT of $500,000 and needs to obtain financing for $1,000,000 of assets. Their tax bracket is 40%. If the firm goes with a short-term financing plan, their rate will be 8 percent, and with a long-term financing plan their rate will be 9 percent.
Required:
Question: What much more or less will their initial annual earnings after taxes be if they choose the most aggressive financing plan?
1) $10,000
2) ($10,000)
3) ($6,000)
4) $6,000
Note: Please provide equation and explain comprehensively and give step by step solution.