PRIN.OF CORPORATE FINANCE >BI<
12th Edition
ISBN: 9781260431230
Author: BREALEY
Publisher: MCG CUSTOM
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Textbook Question
Chapter 18, Problem 13PS
Tax shields Suppose that Congress sets the top personal tax rate on interest and dividends at 35% and the top rate on realized
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Suppose that Congress sets the top personal tax rate on interest and dividends at 35% and the top rate on realized capital gains at 15%. The corporate tax rate stays at 21%. Assume capital gains are half of equity income.
Compute the difference between the total corporate plus personal taxes paid on debt and the total taxes on equity income if all capital gains are realized immediately.
Compute the difference between the total corporate plus personal taxes paid on debt and the total taxes on equity income if all capital gains are deferred forever.
Note: Do not round intermediate calculations. Round your answers to 4 decimal places.
What is the relative tax advantage of corporate debt if the corporate tax rate Tc = 21%, thepersonal tax rate Tp = 37%, but all equity income is received as capital gains and escapestax entirely (TpE = 0%)? How does the relative tax advantage change if the companydecides to pau out all equity income as cash dividends that are taxed at 20%?
The personal tax on interest payments is 33%.The personal tax rate on equity capital gain is 15%.The corporate tax is 35%.Given all these tax rates and all otehr factors are kept constant,will investors have a preference to debt or equity?
A.Cannot determine from the information provided
B.Debt is preferred to equity
C.Equity is preferred to debt
D.M-M proposition I holds and the investors are indifferent between debt and equity
Chapter 18 Solutions
PRIN.OF CORPORATE FINANCE >BI<
Ch. 18 - Prob. 1PSCh. 18 - Tax shields Here are book and market value balance...Ch. 18 - Prob. 3PSCh. 18 - Tax shields The firm cant use interest tax shields...Ch. 18 - Financial distress This question tests your...Ch. 18 - Prob. 6PSCh. 18 - Prob. 7PSCh. 18 - Debt ratios Rajan and Zingales identified four...Ch. 18 - Prob. 9PSCh. 18 - Pecking-order theory Fill in the blanks: According...
Ch. 18 - Financial slack For what kinds of companies is...Ch. 18 - Tax shields Compute the present value of interest...Ch. 18 - Tax shields Suppose that Congress sets the top...Ch. 18 - Tax shields The trouble with MMs argument is that...Ch. 18 - Tax shields Look back at the Johnson Johnson...Ch. 18 - Agency costs Let us go back to Circular Files...Ch. 18 - Agency costs The Salad Oil Storage (SOS) Company...Ch. 18 - Prob. 20PSCh. 18 - Agency costs The possible payoffs from Ms....Ch. 18 - Leverage targets Some corporations debtequity...Ch. 18 - Prob. 25PSCh. 18 - Trade-off theory The trade-off theory relies on...
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- Effective tax planning. Denise Hughes reports the following data from her 2018 tax return. Analyze the data and suggest tax planning ideas that she should consider. Note: The interest income is from a bank savings account earning 1%. The dividends are from a stock paying 3 percent dividends.arrow_forwarda. What is the relative tax advantage of corporate debt if the corporate tax rate is TC=0.22, the personal tax rate on interest is TpD=0.37, but all equity income is received as capital gains and escapes tax entirely ( TpE=0 )? b. How does the relative tax advantage change if the company decides to pay out all equity income as cash dividends that are taxed at 10% ? Note: Do not round intermediate calculations. Round your answers to 4 decimal places.arrow_forwardThe Wendt Corporation reported $45 million of taxable income. Its federal tax rate was 21% (ignore any possible state corporate taxes). What is the company's federal income tax bill for the year? Enter your answer in dollars. For example, an answer of $1.2 million should be entered as 1,200,000. Round your answer to the nearest dollar. $ Assume the firm receives an additional $1 million of interest income from some bonds it owns. What is the additional tax on this interest income? Enter your answer in dollars. For example, an answer of $1.2 million should be entered as 1,200,000. Round your answer to the nearest dollar. $ Now assume that Wendt does not receive the interest income but does receive an additional $1 million as dividends on some stock it owns. Recall that 50% of dividends received are tax exempt. What is the additional tax on this dividend income? Enter your answer in dollars. For example, an answer of $1.2 million should be entered as 1,200,000. Round your…arrow_forward
- Refer to the corporate marginal tax rate information in Table 2.3 . b-1 Compute the average tax rate for a corporation with exactly $335,001 in taxable income. Average tax rate % b-2 What is the average tax rate for a corporation with exactly $18,333,334? Average tax rate % c. The 39 percent and 38 percent tax rates both represent what is called a tax “bubble.” Suppose the government wanted to lower the upper threshold of the 39 percent marginal tax bracket from $335,000 to $216,000. What would the new 39 percent bubble rate have to be? (Round your answer to 2 decimal places. (e.g., 32.16)) Bubble rate %arrow_forwardSuppose that the government has a wealth tax at the rate of 2% on the assessed value of wealth. Suppose that Wendy has invested all her wealth in a private corporation. Her wealth amounts to $4,000,000 in shares of this company. Suppose that this stock delivers a dividend income of $200,000 per year. Assume there is no inflation and that interest rates are 3%. Show your work. 1. Wendy’s wealth tax liability is $___________________. 2. Wendy’s shares generate a net of tax income is $___________________ per year. 3. Suppose a Conservative party were elected on a platform of eliminating the wealth tax. The value of Wendy’s shares if the wealth tax was eliminated would be $______________. 4. The elimination of the wealth tax would reduce government tax revenue and create a budget deficit. Suppose that the country currently has no income tax, but the deficit has the government considering introducing a personal income tax that would replace the lost wealth tax revenue. A personal income…arrow_forwardA corporation pays taxes at the flat rate of 39% and has operating profit of $1 million. It pays interest of $250000 and dividends of $300000 to its investors. All investors share the same tax rates: 35% on interest income and 15% on dividend income. What are the total taxes collected by the government? Group of answer choices 425,000.0 350,000.0 395,000.0 522,500.0arrow_forward
- David would like to organize HOS (a business entity) as either an S corporation or as a corporation (taxed as a C corporation) generating a 12 percent annual before-tax return on a $372,000 investment. David’s marginal tax rate is 24 percent and the corporate tax rate is 21 percent. David’s marginal tax rate on individual capital gains and dividends is 15 percent. HOS will pay out its after-tax earnings every year to either its members or its shareholders. If HOS is taxed as an S corporation, David’s business income allocation would be subject to a 3.8 percent net investment income tax (he is a passive investor in the business), and the business income allocation would qualify for the deduction for qualified business income. (Round your intermediate calculations and final answer to whole number dollar amount.) a. How much would David keep after taxes if HOS is organized as either an S corporation or a C corporation? b. What are the overall tax rates (combined owner and entity level)…arrow_forwardFor its current tax year, Ilex Corporation has ordinary income of $250,000, a short-term capital loss of $20,000 and a long-term capital gain of $60,000. Calculate Ilex Corporation's tax liability for 2020.$ Prior to 2018, the U.S. corporate tax rate structure had eight tax brackets with progressive marginal tax rates ranging from 15 percent to 39 percent. Starting in 2018, corporations are subject to a flat income tax rate. Corporations are limited in the way that capital losses may be deducted. However, losses may be carried back and carried forward.arrow_forwardSuppose you are a wealthy individual paying 35% tax on income. What is the expected after-tax yield on each of the following investments? A municipal note yielding 7.0% pretax. A Treasury bill yielding 11.2% pretax. A floating-rate preferred stock yielding 7.4% pretax. How would your answer change if the investor is a corporation paying tax at 35%?arrow_forward
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