1. In France, the tax on dividends and capital gains is 20%, the corporate tax rate is 32% and the individual tax on interest payments is 50%.

(a) (6 points) Considering personal and corporate taxes does debt has net tax advantage in France? Assuming that aside from tax there are no other advantages or disadvantage of debt, what is the optimal leverage ratio for companies in France?

(b) (6 points) Suppose the new government plans to increase the tax on dividends from 20% to 30%? Should the amount of leverage used by French companies increase or decrease? What is the optimal leverage ratio under new tax regime?