Given the following: Corporate tax rate 35%; Dividend/Capital Gains tax rate: 10%; Ordinary income tax rate 25%.
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Question:
Given the following: Corporate tax rate 35%; Dividend/Capital Gains tax rate: 10%; Ordinary income tax rate 25%. Our company decides to issue incremental debt in order to increase our interest expense by $50 million annually. Show all calculations.
- How much will the incremental debt holders receive after all applicable taxes are paid, assuming they all pay the ordinary income tax rate?
- How much will the company need to reduce its dividend in order to pay the additional interest expense?
- How much will the dividend cut reduce shareholder after-tax annual income?
- How much more or less will the government receive in tax revenues from our company and its bondholders and shareholders?
- What is the effective tax advantage of debt, t*?
Related Book For
Income Tax Fundamentals 2013
ISBN: 9781285586618
31st Edition
Authors: Gerald E. Whittenburg, Martha Altus Buller, Steven L Gill
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