Chapter 17 - Capital Structure: Limits to the Use of Debt
53. Given the following information, leverage will add how much value to the unlevered firm per dollar of debt?
Corporate tax rate: 34%
Personal tax rate on income from bonds: 20% Personal tax rate on income from stocks: 50% A. $-0.050 B. $-0.188 C. $0.367 D. $0.588
E. None of the above
[1 - ((1 - .34)(1 - .5))/(1 - .2)] = 1 - .4125 = $0.5875
Difficulty level: Challenge
Topic: ADDED VALUE OF LEVERAGE WITH TAXES Type: PROBLEMS
54. Given the following information, leverage will add how much value to the unlevered firm per dollar of debt?
Corporate tax rate: 34%
Personal tax rate on income from bonds: 20% Personal tax rate on income from stocks: 30% A. $-0.050 B. $0.006 C. $0.246 D. $0.340 E. $0.423
[1 - ((1 - Tc)(1 - Ts)/(1 - Tb))]B = [1 - ((.66)(.7)/.8)]B = $0.4225
Difficulty level: Challenge
Topic: ADDED VALUE OF LEVERAGE WITH TAXES Type: PROBLEMS
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Chapter 17 - Capital Structure: Limits to the Use of Debt
55. Given the following information, leverage will add how much value to the unlevered firm per dollar of debt?
Corporate tax rate: 30%
Personal tax rate on income from bonds: 20% Personal tax rate on income from stocks: 0% A. $0.125 B. $0.472 C. $0.528 D. $0.825
E. None of the above
[1 - ((1 - Tc)(1 - Ts)/(1 - Tb))]B = [1 - ((.70)(1)/(1 - .2)]B = .125B ; $0.125
Difficulty level: Challenge
Topic: ADDED VALUE OF LEVERAGE WITH TAXES Type: PROBLEMS
56. Holly Berry Incorporated will earn $40 in one year if it does well. The debtholders are promised payments of $25 in one year if the firm does well. If the firm d