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:
50%
Personal tax rate on income from stocks:
12%
A)$-0.050
B)$-0.162
C)$0.188
D)$0.633
E)None of the above.

Question

Quizplus · Accepted Answer

The value of leverage per dollar of debt can be calculated as follows:

Value of leverage = (1 - corporate tax rate) x [personal tax rate on income from bonds - personal tax rate on income from stocks]
                  = (1 - 0.34) x [0.5 - 0.12]
                  = 0.66 x 0.38
                  = 0.2508

Therefore, leverage will add $0.2508 of value to the unlevered firm per dollar of debt. However, this value is negative, indicating that leverage will actually hurt the firm's value. Option B is the only answer that reflects this negative value.

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