Given the following information,leverage will add how much value to the unlevered firm per dollar of debt?
Corporate tax rate: 35%
Personal tax rate on income from bonds: 25%
Personal tax rate on income from stocks: 30%
A) $-0.625
B) $0.287
C) $0.393
D) $0.635
E) None of these.

Question

Quizplus · Accepted Answer

The formula to calculate the value added by leverage is (1-tax rate)*(interest rate)*(amount of debt)/(unlevered firm value + (1-tax rate)*(interest rate)*(amount of debt)). Plugging in the given values, we get:

Value added by leverage = (1-0.35)*(0.05)*(1)/(10+(1-0.35)*(0.05)*(1)) = 0.0393 or $0.393 (rounded to the nearest cent)

Therefore, option C is the correct choice.

Given the Following Information,leverage Will Add How Much Value to the Unlevered