The Kimberly Corporation is a zero growth firm with an expected EBIT of $100,000 and a corporate tax rate of 30%. Kimberly uses $500,000 of 12.0% debt, and the cost of equity to an unlevered firm in the same risk class is 16.0%.
-Assume that the firm's gain from leverage according to the Miller model is
$126,667. If the effective personal tax rate on stock income is TS = 20%, what is the implied personal tax rate on debt income?
A) 16.4%
B) 18.2%
C) 20.2%
D) 22.5%
E) 25.0%

Question

The Kimberly Corporation is a zero growth firm with an expected EBIT of $100,000 and a corporate tax rate of 30%.	Kimberly uses $500,000 of 12.0% debt, and the cost of equity to an unlevered firm in the same risk class is 16.0%.
-Assume that the firm's gain from leverage according to the Miller model is
$126,667. If the effective personal tax rate on stock income is TS = 20%, what is the implied personal tax rate on debt income?
A) 16.4%
B) 18.2%
C) 20.2%
D) 22.5%
E) 25.0%

Quizplus · Accepted Answer

The Answer of The Kimberly Corporation is a zero growth firm with an expected EBIT of $100,000 and a corporate tax rate of 30%.	Kimberly uses $500,000 of 12.0% debt, and the cost of equity to an unlevered firm in the same risk class is 16.0%.
-Assume that the firm's gain from leverage according to the Miller model is
$126,667. If the effective personal tax rate on stock income is TS = 20%, what is the implied personal tax rate on debt income?
A) 16.4%
B) 18.2%
C) 20.2%
D) 22.5%
E) 25.0%

The Kimberly Corporation Is a Zero Growth Firm with an Expected