Attached questions and the answer .. need to explain\

answers

A7. a. Total Tax on Interest = CFBT x T

d

= $100 x 0.30 = $30

After-tax Interest Income = CFBT x (1 - T

d

) = $100 x (1 - 0.30) = $70

b. Total Tax on Dividend = CFBT x T + CFBT (1 - T) x T

e

= $100 x 0.30 + $100 (1 - 0.30) x 0.20

Total Tax on Dividend = $30 + $14 = $44

After-tax Dividend Income = CFBT (1 - T) (1 - T

e

) = $100 (1 - 0.30) (1 - 0.20) = $56

c. The tax rates are not neutral. Debt financing is favored.

47. (Corporate and personal taxes) Sarin Sofrware Corporation has a corporate tax rate o isbondholders have a personal tax rate of 30% and the effective tax rate that its stock holders pay is 20%. a. Sarin has $100 of before-tax cash flows, which it pays as interest to its bondholders. What is the total corporate and personal tax on this cash flow? What is after-tax bond holder income? b. Sarin has S100 of before-tax cash flows. Afte r corporate taxes, it is distributing the bal- ance to stockholders. What is the total corporate and personal tax on this cash flow? What is after-tax stockholder income? c Are these tax rates neutral Which form of financing is favored, debt or equity financing