Question

CORPORATE TAXES -

(A) Given the following tax rates: 50% personal and 33% corporate, and assuming the firm in question compensates it stockholders entirely through capital gains that will not be realized for the foreseeable future, should this firm do its next finance with debt or equity (based solely on taxes)? Why?

BANKRUPTCY COSTS -

(B) According to Yahoo! Finance, OncoGenex is a biopharmaceutical company that engages in the development and commercialization of new cancer therapies that address treatment resistance in cancer patients. What would you guess the debt-to-equity ratio is? Why?

(C) In an attempt to balance the budget, Congress just increased the corporate tax rate to 75 percent. How will most firms change their debt-to-equity (D/E) Ratio? What will that D/E ratio change probably do to personal taxes paid by investors (even if personal taxes remain unchanged)? What do you think the D/E change will do to bankruptcy costs?

Answer 1

(A) Here the firm in this question compensates it stockholders entirely through capital gains that will not be realized for the foreseeable future, So according to me this firm Should do its next finance with debt because the corporate tax is 33% and also here company can have a deduction for interest on it and personal tax is 50% which is also more than the corporate tax so more tax is needed to pay on the return on the shares so it is beneficial for the company to issue debt or finance the funds from the Debt. Here the company is earned income from CaPital gain also so there is no return of tax policy then the overall decision to finance the funds from debt due to two reasons one is of interest deduction and secoud is low tax as compared to personal tax

(B) The debt-to-equity ratio is according to me is not more that 2:1 because the effective or normal Debt Euity ratio is 2:1 And also company here is trying to make the Ratio as high as possible if there is a HIgh Risk of Successful innovation of a company so that after in futuree the earning is distributed more to shareholders and take the benefit of Trading of Equity and if there is more chance of failure then try to decrease the Ratio and also always in mind to follow the laws compliance

(C) If the corporate Tax Rate is increased from 33 to 75% now company goes to equity from debt it can be done by newly issue the shares of introducing IPO and make the payment of Debt with these funds becouse here now the personal tax rate is less than the corporate tax rate. Yess the Debt Equity RAtio Is changes to do the change is Bankrupty costs