Consider an economy with both corporate and personal taxes. Assume that the corporate tax rate is Tc,
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Consider an economy with both corporate and personal taxes. Assume that the corporate tax rate is Tc, and That the personal tax rate is Td for interest income and Tc for equity income. Ignore all other market imperfections. If (1-Tc)(1-Te) = (1 - Td), then
A) The firm should definitely hold debt
B) The value of the levered firm is greater than the value of the unlevered firm
C) The tax shield on debt is exactly offset by higher personal taxes paid on interest income.
D) The tax shield on debt is exactly offset by higher levels of dividends
E) The Tax shield on debt is exactly offset by higher capital gains
Which one is true/correct?
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