Suppose That a Company Can Direct $1 to Either Debt

question 58

Multiple Choice

Suppose that a company can direct $1 to either debt interest or to capital gains for equity investors. The capital gains tax rate is 15 percent. Which investor would not care how the money is channeled? (The marginal corporate tax rate is 21 percent.)

• A)Investors paying zero personal tax
• B)Investors paying a personal tax rate of 53 percent
• C)Investors paying a personal tax rate of 17.5 percent
• D)Investors paying a personal tax rate of 33 percent

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Definitions:

Replenishment Lead Time

The time span from when an order is placed until it is received and ready for use or sale, including order preparation, processing, and shipping.

Safety Inventory

Inventory kept as a precaution against supply and demand fluctuations, aiming to prevent stockouts and maintain service levels.

Single Sourcing

The procurement practice of acquiring goods or services from one selected supplier.

Buyer-Specific Investment

Investments made by a company tailored to the needs or specifications of a single buyer, often to strengthen the business relationship or secure long-term contracts.