Suppose the corporate tax rate is 38%?, and investors pay a tax rate of 15% on...

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Suppose the corporate tax rate is 38%?, and investors pay a taxrate of 15% on income from dividends or capital gains and a taxrate of 30.1% on interest income. Your firm decides to add debt soit will pay an additional $20 million in interest each year. Itwill pay this interest expense by cutting its dividend. a. How muchwill debt holders receive after paying taxes on the interest they?earn? b. By how much will the firm need to cut its dividend eachyear to pay this interest? expense? c. By how much will this cut inthe dividend reduce equity? holders' annual? after-tax income? d.How much less will the government receive in total tax revenueseach? year? e. What is the effective tax advantage of debttau??*?

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Solution a Debt holders receive after paying taxes 20 million x 1 0301 Debt holders receive after paying taxes 1398 See Answer

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Suppose the corporate tax rate is 38%?, and investors pay a taxrate of 15% on income from dividends or capital gains and a taxrate of 30.1% on interest income. Your firm decides to add debt soit will pay an additional $20 million in interest each year. Itwill pay this interest expense by cutting its dividend. a. How muchwill debt holders receive after paying taxes on the interest they?earn? b. By how much will the firm need to cut its dividend eachyear to pay this interest? expense? c. By how much will this cut inthe dividend reduce equity? holders' annual? after-tax income? d.How much less will the government receive in total tax revenueseach? year? e. What is the effective tax advantage of debttau??*?