The introduction of personal taxes may reveal a disadvantage to the use of corporate debt if the personal tax rate on:
A)the distribution of income to stockholders is less than the personal tax rate on interest income.
B)the distribution of income to stockholders is greater than the personal tax rate on interest income.
C)the distribution of income to stockholders is equal to the personal tax rate on interest income.
D)interest income is zero.
E)dividends and interest are equal.

Question

Quizplus · Accepted Answer

If the personal tax rate on the distribution of income to stockholders is less than the personal tax rate on interest income, it will make the use of corporate debt less attractive as compared to paying out profits as dividends, since stockholders will have to pay a higher tax on the interest income earned from corporate debt as compared to the tax on dividend income. This will result in a preference for paying out dividends, which will lead to a shift away from the use of corporate debt.

The Introduction of Personal Taxes May Reveal a Disadvantage to the Use