Given the following information,leverage will add how much value to the unlevered firm per dollar of debt?
Corporate tax rate: 34%
Personal tax rate on income from bonds: 20%
Personal tax rate on income from stocks: 50%
A) $-0.050
B) $-0.188
C) $0.367
D) $0.588
E) None of these.

Question

Quizplus · Accepted Answer

To calculate the value of leverage, we need to use the following formula:
Value of leverage = (Corporate tax rate * Debt) / (1 - Personal tax rate on income from bonds)
= (0.34 * 1) / (1 - 0.20)
= 0.425

Now, to calculate the value of leverage per dollar of debt, we divide the value of leverage by the amount of debt:
Value of leverage per dollar of debt = Value of leverage / Debt
= 0.425/1
= 0.425

Therefore, the value of leverage will add $0.425 to the unlevered firm per dollar of debt. So, the best choice is D.

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