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