Suppose the corporate tax rate is 38%, and investors pay a tax rate of 25% on income from dividends or capital gains and a tax rate of 35.5% on interest income. Your firm decides to add debt so it will pay an additional $15 million in interest each year. It will pay this interest expense by cutting its dividend. By how much will the firm need to cut its dividend each year to pay this interest expense?

Suppose the corporate tax rate is 38%, and investors pay a tax rate of 25% on income from dividends or capital gains and a tax rate of 35.5% on interest income. Your firm decides to add debt so it will pay an additional $15 million in interest each year. It will pay this interest expense by cutting its dividend. By how much will the firm need to cut its dividend each year to pay this interest expense?

Intermediate Financial Management (MindTap Course List)

13th Edition

ISBN:9781337395083

Author:Eugene F. Brigham, Phillip R. Daves

Publisher:Eugene F. Brigham, Phillip R. Daves

Chapter17: Dynamic Capital Structures And Corporate Valuation

Section: Chapter Questions

Problem 3P

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