How does the federal income tax structure impact a businesses decision to finance with use of debt vs. equity?

This sounds like a homework question.

If you're using a leveraging formula, you need to take the tax rate into account along with the interest on the debt in order to have return on assets as well as return on equity. The impact is that interest on your profits are taxable, while the interest on your debt is deductible. (Corporations using capital budgeting will usually use a 35% tax rate, their highest.)

(You really need to get the formula from your instructor. These vary from one school to the next because you're into decision making, and there's no universal formula for a decision process.)

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