An unlevered firm operates in perfect capital markets except that there are both corporate and personal taxes. The corporate tax rate is 25%, the personal tax rate on income from stock is 20%, and the personal tax rate on interest income from debt is 30%. If the firm borrows $10 million at 4% interest and uses the proceeds to retire stock, the value of the firm will ______ not change at all decrease by about $143,000 increase by about $143,000 increase by about 14.3%
An unlevered firm operates in perfect capital markets except that there are both corporate and personal taxes. The corporate tax rate is 25%, the personal tax rate on income from stock is 20%, and the personal tax rate on interest income from debt is 30%. If the firm borrows $10 million at 4% interest and uses the proceeds to retire stock, the value of the firm will ______ not change at all decrease by about $143,000 increase by about $143,000 increase by about 14.3%
Chapter13: Capital Structure Concepts
Section: Chapter Questions
Problem 4P
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Transcribed Image Text:An unlevered firm operates in perfect capital markets except that there are both
corporate and personal taxes. The corporate tax rate is 25%, the personal tax rate on
income from stock is 20%, and the personal tax rate on interest income from debt is
30%. If the firm borrows $10 million at 4% interest and uses the proceeds to retire
stock, the value of the firm will
not change at all
decrease by about $143,000
increase by about $143,000
increase by about 14.3%
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