Your company has EBIT of $5,000,000, debt of $100,000,000 and required return of 20 percent. Currently, the corporate tax rate is 30 percent, the personal income tax rate on bond income is 30 percent, and the personal tax rate on stock income to 30 percent. Suppose that the Senate is proposing to reduce the corporate tax rate to 20 percent, and reduce the personal tax rate on stock income to 20 percent, and leave the personal tax rate on bond income at 30 percent. The House of Representatives is proposing to increase the corporate tax rate to 40 percent, leave the personal tax rate on stock income at 30 percent, and leave the tax rate on bond income at 30 percent.

a. (15) Which plan the Senate plan or House plan, is better for your company (calculations required)?

b. (5) Briefly explain why the tax rates proposed by the Senate or the House are better for your company.