Eccles Inc., a zero growth firm, has an expected EBIT
Question # 00433828
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Updated on: 12/01/2016 02:58 AM Due on: 12/01/2016
Exhibit 17.1
Eccles Inc., a zero growth firm, has an expected EBIT of $100,000 and a corporate tax rate of 30%. Eccles uses $500,000 of 12.0% debt, and the cost of equity to an unlevered firm in the same risk class is 16.0%.
Refer to Exhibit 17.1. Assume that the firm's gain from leverage according to the Miller model is $126,667. If the effective personal tax rate on stock income is TS =20%, what is the implied personal tax rate on debt income?
A. 18.2%
B. 16.4%
C. 20.2%
D. 22.5%
E. 25.0%
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Solution: Eccles Inc., a zero growth firm, has an expected EBIT