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    Capital Structure

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    A and B are arguing again over which form of financing (debt or equity) is better. Assume that both are residents of the same country, and are subject to the same marginal tax rate on equity income which is 25%. Further, assume that expected rates of return on debt and zero-beta equity are as follows:

    Rd = 8% Re = 6%

    If A has a tax rate on debt income of 35% and B has a tax rate of debt income of 25%, which form of financing would each prefer?

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    Solution Preview

    Analysis for A:

    After Tax Rate on Debt = 8%*(1-.35) = ...

    Solution Summary

    The solution does a great job of answering the question regarding capital structure. The solution is brief and concise and very easy to follow along. All the steps are clearly shown. It can be easily understood by anyone with a basic understanding of the topic. Overall, an excellent solution.