A company has profits of £500,000 before interest. The company is considering two options to finance a new project: Option 1 is to borrow £200,000 at 10% interest per year. Option 2 is to issue new shares and raise £200,000 equity. The company pays Corporation Tax at the rate of 25%. If the company chooses Option 1, it will have profits of £480,000 before tax (after deducting interest).
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