The Berry Company has $500,000 of perpetual debt outstanding

Finance Dec 24, 2020

The Berry Company has $500,000 of perpetual debt outstanding. According to the Miller Model, the gains from leverage the firm experiences is $170,588. If the effective personal tax rate on stock income is 20 percent, and if the corporate tax rate is 30 percent, what is the implied personal tax rate on debt income?

Group of answer choices

A) 35 percent

B) 15 percent

C) 22 percent

D) 12 percent

E) 24 percent

Expert Solution

Computation of the tax rate on debt income:-

Gain from leverage = Debt*(1-(1-Corporate tax rate)*(1-Tax rate on stock)/(1-Tax rate on debt))

170588 = 500000*(1-(1-30%)*(1-20%)/(1-Tax rate on debt))

170588/500000 = 1-(0.56/(1-Tax rate on debt))

1-0.3412 = 0.56/(1-Tax rate on debt)

(1- Tax rate on debt) = 0.56/0.6588

Tax rate on debt = 1 - 0.85

= 15%

Hence, the correct option is B) 15%

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