NARRBEGIN: Bavarian Brew Bavarian Brew

NARRBEGIN: Bavarian Brew
Bavarian Brew
Bavarian Brew,an unlevered firm,has an expected EBIT of $500,000.The required return on assets for the firm's assets is 10%.The company has 250,000 shares outstanding.The company is considering raising $1 million in debt with a required return of 6% and would use the proceeds to repurchase outstanding stock.
-What is the gain from leverage for Bavarian Brew if the corporate tax rate equals 34%.In addition,assume that the personal tax rate on interest income equals 40% and that there is no tax on dividend income.

A) -$100,000
B) $100,000
C) $340,000
D) -$340,000