An unlevered firm operates in perfect capital markets except that there are both corporate and personal taxes. The corporate tax rate is 25%, the personal tax rate on income from stock is 20%, and the personal tax rate on interest income from debt is 40%. If the firm borrows $10 million at 4% interest and uses the proceeds to retire stock, the value of the firm will decrease not change at all increase increase by about $2.5 million
An unlevered firm operates in perfect capital markets except that there are both corporate and personal taxes. The corporate tax rate is 25%, the personal tax rate on income from stock is 20%, and the personal tax rate on interest income from debt is 40%. If the firm borrows $10 million at 4% interest and uses the proceeds to retire stock, the value of the firm will decrease not change at all increase increase by about $2.5 million
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
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Transcribed Image Text:An unlevered firm operates in perfect capital markets except that there are both
corporate and personal taxes. The corporate tax rate is 25%, the personal tax rate on
income from stock is 20%, and the personal tax rate on interest income from debt is
40%. If the firm borrows $10 million at 4% interest and uses the proceeds to retire
stock, the value of the firm will
decrease
not change at all
increase
increase by about $2.5 million
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