Question
Eccles Inc., a zero growth firm, has an expected EBIT of $100,000 and a corporate tax rate of 30%. Eccles uses $500,000 of 12.0% debt,
Eccles Inc., a zero growth firm, has an expected EBIT of $100,000 and a corporate tax rate of 30%. Eccles uses $500,000 of 12.0% debt, and the cost of equity to an unlevered firm in the same risk class is 16.0%.
Refer to Exhibit 17.1. Assume that the firm's gain from leverage according to the Miller model is $126,667. If the effective personal tax rate on stock income is TS = 20%, what is the implied personal tax rate on debt income?
| a. | 16.4% | |
| b. | 18.2% | |
| c. | 25.0% | |
| d. | 20.2% | |
| e. | 22.5% |
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Financial Management Principles And Applications
Authors: Arthur J. Keown, J. William Petty, John D. Martin, Jr. Scott, David F.
10th Edition
0131450654, 9780131450653
