# Suppose the corporate tax rate is 40%, and investors pay a tax rate of 15% on income

## Question:

a. How much will debt holders receive after paying taxes on the interest they earn?

b. By how much will the firm need to cut its dividend each year to pay this interest expense?

c. By how much will this cut in the dividend reduce equity holders’ annual after-tax income?

d. How much less will the government receive in total tax revenues each year?

e. What is the effective tax advantage of debt t*?

Dividend

A dividend is a distribution of a portion of company’s earnings, decided and managed by the company’s board of directors, and paid to the shareholders. Dividends are given on the shares. It is a token reward paid to the shareholders for their...

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