If the corporate tax rate equals 34% and dividend income is tax free, at which personal tax rate on interest income is there no gain from leverage?

Intermediate Financial Management (MindTap Course List)
13th Edition
ISBN:9781337395083
Author:Eugene F. Brigham, Phillip R. Daves
Publisher:Eugene F. Brigham, Phillip R. Daves
Chapter17: Dynamic Capital Structures And Corporate Valuation
Section: Chapter Questions
Problem 2P
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Bavarian Brew, an unlevered firm, has an expected EBIT of $500,000. The required return on assets for the firm’s assets is 10%. The company has 250,000 shares outstanding. The company is considering raising $1 million in debt with a required return of 6% and would use the proceeds to repurchase outstanding stock. Refer to Bavarian Brew. If the corporate tax rate equals 34% and dividend income is tax free, at which personal tax rate on interest income is there no gain from leverage? Group of answer choices 15% 34% 40% 0%

 

 

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