Final answer:
Flying Tiger Corp. would save $3,000 per year in taxes due to the interest expense from the newly issued debt being tax-deductible at a corporate tax rate of 30%.
Step-by-step explanation:
Flying Tiger Corp.'s decision to issue $100,000 in new debt with an annual interest expense of 10% has implications for its tax savings, given a corporate tax rate of 30%. The annual interest expense on the new debt is calculated as 10% of $100,000, resulting in $10,000.
The tax savings arise from the deductibility of interest expenses from the company's taxable income. As per the tax code, interest payments on debt are considered a business expense and are tax-deductible. Therefore, Flying Tiger Corp. can reduce its taxable income by the amount of interest paid on the new debt.
With a corporate tax rate of 30%, the tax savings can be calculated as 30% of the interest expense. In this case, 30% of $10,000 is $3,000. Therefore, Flying Tiger Corp. is expected to save $3,000 per year in taxes as a result of the interest expense on the newly issued debt.
This tax-saving strategy is a common consideration for companies, as it leverages the deductibility of interest payments to optimize their tax liability. By strategically managing their capital structure and utilizing debt financing, companies can enhance their financial efficiency and minimize their overall tax burden, contributing to improved financial performance and shareholder value.