Given the following information,leverage will add how much value to the unlevered firm per dollar of debt?
Corporate tax rate: 40%
Personal tax rate on income from bonds: 20%
Personal tax rate on income from stocks: 30%
A) $-0.475
B) $0.475
C) $0.525
D) $0.633
E) None of these.

Question

Quizplus · Accepted Answer

Based on the given information, the value of leverage in terms of the increase in value per dollar of debt can be calculated using the formula:
Value of Leverage = (Corporate Tax Rate) x (1- Personal Tax Rate on Income from Bonds) / (1- Personal Tax Rate on Income from Stocks)
Plugging in the given values, we get:
Value of Leverage = (40%) x (1-20%) / (1-30%) = 0.475
This means that for every dollar of debt, leverage will add $0.475 of value to the unlevered firm. Therefore, the best choice is B.

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