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

Question

Quizplus · Accepted Answer

The formula for the value of leverage per pound of debt added is: 
V_L = (1 - T_c) * D * (1 - T_pB) / E + D
where V_L is the value of leverage, D is the amount of debt added, T_c is the corporate tax rate, T_pB is the personal tax rate on income from bonds, and E is the value of the unlevered firm. 
Plugging in the given values, we get: 
V_L = (1 - 0.34) * 1 * (1 - 0.20) / 1 + 1 = £0.588
Therefore, adding £1 of debt will increase the value of the unlevered firm by £0.588, making option D the correct answer.

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