Jackie would like to borrow $125,000 to expand her small business, but needs to understand the impact of the 6-percent interest payments. Last year, her company did not pay any interest and had total earnings before tax of $143,500. The tax rate was 30 percent. Determine the company s net income for the year. Assuming that EBIT and the rate of taxation will not change, calculate how much the net income figure will change if Jackie proceeds with the loan. Explain to Jackie why her company s net income does not fall by the full amount of the interest payments.
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