In Fantastic Biz, both dividend and interest income are taxed at the same rate.A new tax law is passed that increases both corporate and personal tax rates. What effect will this likely have on the capital structure decision of the nations firms?

which one is the correct answer

Since both debt and equity income are taxed at the same rate, the optimal capital structure for most firms will be 50% debt and 50% equity when personal taxes are taken into consideration

Firms will use more equity in their capital structure

There will be no change in the capital structure of the nations firms since both corporate and personal tax rates have increased

Firms will use more debt in their capital structure