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A stationery company plans to launch a new type of indelible ink pen. Advertising for the new product will be heavy and will cost the company $10 million, although the company expects general revenues of $280 million next year from sources other than sales of the new pen. If the company has a corporate tax-rate of 40% on its pretax income, what effect will the advertising for the new pen have on its taxes?

▸ It will have no effect on taxes.

▸ Increase taxes by $10 million

▸ Increase taxes by $4 million

▸ Reduce taxes by $4 million
Textbook 
Fundamentals of Corporate Finance
Edition: 2nd
Authors:
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Reduce taxes by $4 million
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