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  3. 3. corporate and personal taxes (20 points) a) an

3. Corporate and Personal Taxes (20 points) a) An investor considers whether to invest in...

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Accounting

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3. Corporate and Personal Taxes (20 points) a) An investor considers whether to invest in debt or equity of Kyle Corporation. Since he already has to pay a high personal tax rate, he does not want to pay more taxes than necessary. Therefore, he weights the pros and cons of investing in bonds or equities in the local financial markets. The personal tax rate on interest income is 50%, the corporate tax rate is 30% and the tax rate on dividends is 20%. Which strategy do you recommend the investor based on your calculations? (10 points) b) Kyle Corporation wants to assess the value of interest savings due to the tax deductibility of interest on debt. The corporate tax rate is given above. The total debt stands at $ 6 million and the return on debt is 6%. Assuming that the current level of debt is permanent, calculate the annual interest payment due before/after tax and the present value of the perpetual tax shield. Explain in what situations a tax shield might be less relevant and/or even misleading. (10 points)

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