In Australia, the tax on dividends and capital gains is 15%, the corporate tax rate is 30% and the individual tax on interest payments is 50%.

(a) Considering personal and corporate taxes, does debt have a net tax advantage in Australia? Assuming that other than tax there are no advantages or disadvantages of debt, what is the optimal leverage ratio (0% to 100%) for companies in Australia?

(b) Suppose the new government plans to increase the tax on dividends from 15% to 30%? Should the amount of leverage used by Australian companies increase or decrease? What is the optimal leverage ratio under new tax regime?