Question
You are working as the Chief Financial Officer of Noah Inc. Noah Inc. has $600,000,000 in 10% debt outstanding. The corporate tax rate is 35%.
You are working as the Chief Financial Officer of Noah Inc. Noah Inc. has $600,000,000 in 10% debt outstanding. The corporate tax rate is 35%.
- If the personal tax rate for both debt and equity income is 0, what is the value of the interest tax shield?
- Now assume personal taxes do exist, and the personal tax rate on interest income is twice that of equity income. At what personal tax rate on equity income does the advantage of debt financing vanish?
- If the personal tax rate on equity income is 15% and interest income is 30%, should the firm try to eliminate its debt? Show your work.
- Could you have answered part (c) without any additional calculations (i.e. given what you had already calculated earlier in the question)? Why or why not?
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Financial management theory and practice
Authors: Eugene F. Brigham and Michael C. Ehrhardt
13th edition
1439078106, 111197375X, 9781439078105, 9781111973759, 978-1439078099
