Question
In: Finance
Suppose the corporate tax rate is 35%, and investors pay a tax rate of 15% on...
Suppose the corporate tax rate is
35%,
and investors pay a tax rate of
15%
on income from dividends or capital gains and a tax rate of
37.3%
on interest income. Your firm decides to add debt so it will pay an additional
$20
million in interest each year. It will pay this interest expense by cutting its dividend.
a. How much will debt holders receive after paying taxes on the interest they earn?
b. By how much will the firm need to cut its dividend each year to pay this interest expense?
c. By how much will this cut in the dividend reduce equity holders' annual after-tax income?
d. How much less will the government receive in total tax revenues each year?
e. What is the effective tax advantage of debt
Solutions
Expert Solution
SEE THE IMAGE. ANY DOUBTS,
FEEL FREE TO ASK. THUMBS UP PLEASE
jeff jeffy answered 1 year agoRelated Solutions
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rate from 35% to 20% (for the record, I originally wrote this
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with re-estimating the remaining PV of a project’s cash flows. The
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