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In a special tax structure, equity income is taxed at 22%, debt income is taxed at...

In a special tax structure, equity income is taxed at 22%, debt income is taxed at 32%, and corporate tax rate is 35%. How much value per dollar of debt will leverage add to a firm that is currently unlervered? Answer:$ Place your answer in dollars and cents. For best accuracy use three decimal places. No dollar sign

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Answer #1

The value added by taking on more debt will be equal to

1-((1-corporate tax)*(1-Equity tax)/(1- Tax on debt)

= 1-((1-0.35)*(1-0.22)/(1-0.32))

=0.25

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