Question

Suppose that the corporate income tax rate is 30%, the personal income tax rate on dividend income and the interest tax rate are both 35%, and the capital gains tax rate is 20%. Compare the after-tax returns on each dollar of corporate earnings under three investment financing strategies:
a. The corporation finances using debt.
b. The corporation finances by issuing equity but does not pay dividends.
c. The corporation finances by equity and pays all its income in dividends.


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  • CreatedApril 25, 2015
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