You are an unlevered firm and are trying to decide whether to issue debt (and therefore...

 

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You are an unlevered firm and are trying to decide whether to issue debt (and therefore become a "levered" firm). Assume the corporate income tax rate is 30% (i.e., Tc = 30%). In addition, the personal tax rate on debt income is 40% (Tp = 40%) and the personal tax rate on equity income is 20% (Tpe = 20%). Taking into account both corporate and personal taxes, and using the method discussed in class, is there a tax advantage or tax disadvantage for this unlevered firm to issuing debt and becoming a levered firm? O There is a tax advantage to issuing debt (i.e., the combined corporate and personal tax will be less for the levered firm). O There is a tax advantage to remaining unlevered (i.e., the combined corporate and personal tax will be less for the unlevered firm). You are an unlevered firm and are trying to decide whether to issue debt (and therefore become a "levered" firm). Assume the corporate income tax rate is 30% (i.e., Tc = 30%). In addition, the personal tax rate on debt income is 40% (Tp = 40%) and the personal tax rate on equity income is 20% (Tpe = 20%). Taking into account both corporate and personal taxes, and using the method discussed in class, is there a tax advantage or tax disadvantage for this unlevered firm to issuing debt and becoming a levered firm? O There is a tax advantage to issuing debt (i.e., the combined corporate and personal tax will be less for the levered firm). O There is a tax advantage to remaining unlevered (i.e., the combined corporate and personal tax will be less for the unlevered firm).

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