Answered: Given the following information,…

FINANCIAL ACCOUNTING

10th Edition

ISBN:9781259964947

Author:Libby

Publisher:Libby

Chapter1: Financial Statements And Business Decisions

Section: Chapter Questions

Problem 1Q

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Question

Given the following information, leverage will add how much value to the unlevered firm per dollar of debt?
Corporate tax rate: 35%
Personal tax rate on income from bonds: 25%
Personal tax rate on income from stocks: 30%

$-0.625

$0.287

$0.393

$0.635

E.	None of these

Expert Solution

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The management likes to use leverage for making investment strategy if they are funding from various sources in a way that leads to high return on investment.

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Follow-up Question

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: 40%

Personal tax rate on income from stocks: 30%

I know the answer is 0.138 dollars, but following your method the answer is 0.23 dollars. Are you sure this is correct?

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