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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,
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 unlevered firm in the same risk class is 16%.
a. What is the value of the firm according to Modigliani-Miller 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 tax rae on stock income is Ts=25%, what is the implied personal tax rate on debt income?
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