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1. Airline A and Airline B both have earnings before interest and taxes (EBIT) of $100 million. Airline B has no debt, while Airline A has interest expenses of $20 million. Assume a tax rate of 35% applies to both airlines.
How many dollars will Airline A pay in taxes? Type your answer into the textbox.

2. Discuss in a the importance of understanding taxes and what financial choices will have an impact on taxable income. Would Airline A have been willing to take on a debt that would cost $20 million in interest if they had not considered the tax break it would afford



Answer :

Airline A will pay $28 million in taxes based on the EBIT of $100 million

The increase in interest expenses by $20 million means that the  income tax expense decreases by $7 million.

What is the taxable earnings for company A?

The fact that company A has debt and would pay interest expenses of $20 million means that its taxable income is the earnings before interest and tax minus the interest expense

taxable income=$100 million-$20 million

taxable income=$80 million

taxes=taxable income*tax rate

tax rate=35%

company A's taxes=$80 million*35%

company A's taxes=$28 million

It should be noted that the higher the increase in interest expenses, the higher the tax savings that Airline A would achieve, hence, adding an additional borrowing which costs an extra $20 million in interest means that the company's taxes can be computed as shown below:

taxable income=$100 million-$20 million-$20 million

taxable income=$60 million

taxes=taxable income*tax rate

tax rate=35%

company A's taxes=$60 million*35%

company A's taxes=$21 million

In other words, Airline A would achieve a $7 million savings in taxes since the increase in interest expenses means that taxes decrease from $28 million to $21 million

Find out more EBIT and tax planning on:brainly.com/question/14594005

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