Assume that LoPine Ltd,a US-based company (which has a classical taxation system),borrows $10 million at an interest rate of 15 per cent and uses the funds to repurchase shares worth $10 million.Further,assume that the company tax rate is 35 per cent,the marginal income tax rate is 30 per cent and the average tax rate on equity income is 12 per cent.Calculate the net tax savings per year.

Question

Quizplus · Accepted Answer

The interest expense is $1.5 million (15% of $10 million). The tax shield from the interest expense is $1.5 million * 35% = $525,000. The tax on equity income saved is $10 million * 12% = $1.2 million. The net tax savings is $525,000 - $1.2 million * 30% = $192,000.

Assume That LoPine Ltd,a US-Based Company (Which Has a Classical