As owner of 10 percent of ABC Industries, you have control of its capital structure decision. The current corporate tax rate is 34 percent and your personal tax rate is 31 percent. Assume that the returns to stockholders accrue as nontaxable capital gains. ABC currently has no debt and can finance the repurchase of 10 percent of its outstanding shares by borrowing $100 million at the risk free rate of 10 percent. The AAA (taxfree)

municipal bond rate is 8 percent. If you hold your 10 percent of the firm constant and buy the municipal bonds, what is your annual after-tax gain from this transaction?

AppendixLO1