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?© BrainMass Inc. brainmass.com October 10, 2019, 3:50 am ad1c9bdddf
Analysis for A:
After Tax Rate on Debt = 8%*(1-.35) = ...
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