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Capital Structure Eccles Inc., a zero growth firm, has an expected EBIT of $120,000 and a corporate tax rate of 35%. Eccles uses $500,000 of
Capital Structure
Eccles Inc., a zero growth firm, has an expected EBIT of $120,000 and a corporate tax rate of 35%. Eccles uses $500,000 of 12% debt, and the cost of equity to an unleveled firm in the same risk class is 16%.
a.) What is the value of the firm according to the MM with corporate taxes?
b.) What is the firm's cost of equity?
c.) Assume that the firm's gain from leverage according to the Miller model is $130,000. If the effective personal taxe rate on stock income is Ts = 25%, what is the implied personal tax rate on debt income?
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