1. Given the following: Corporate tax rate 40%; Dividend/Capital Gains tax rate: 15%; Ordinary income tax rate 35%. Our company decides to issue incremental debt in order to increase our interest expense by $25 million annually.

   1. How much will debt holders receive after all applicable taxes are paid?

   2. How much will the company need to reduce its dividend in order to pay the additional interest expense?

   3. How much will the dividend cut reduce shareholder after-tax annual income?

   4. How much more or less will the government receive in tax revenues from our company and its bondholders and shareholders?

   5. What is the effective tax advantage of debt, *?