Suppose we are at the end of 2019. All cash flows arrive at the end of each
Fantastic news! We've Found the answer you've been seeking!
Question:
Currently, Firm C is an all equity firm and has no debt. It could borrow at an interest rate of 5%. Assume that the marginal personal tax rate for equity income is and will be 30%, and the marginal personal tax rate for debt (interest) income is and will be 35%. Assume that all investors are taxable and all investments are made in taxable accounts (so there are no tax-exempt investors and no investments in tax-deferred accounts).
In a world in which the only deviation from perfect capital markets is the existence of taxes, should Firm C choose a leverage ratio (D/(D+E)) above 78% at the end of 2019 if Firm C chooses its leverage ratio to maximize its firm value? Assume that all interest payments have to be made at the end of each year and the first interest payment would have to be made at the end of 2020. Assume that any interest expense that cannot be used to reduce corporate taxes in the year it is paid cannot be used to reduce corporate taxes in any past or future year either. Ignore the limits on the tax deductibility of interest imposed by the Tax Cuts and Jobs Act of 2017.
Related Book For
Fundamentals Of Corporate Finance
ISBN: 9780135811603
5th Edition
Authors: Jonathan Berk, Peter DeMarzo, Jarrad Harford
Posted Date: