The Kimberly Corporation Is a Zero Growth Firm with an Expected

question 2

Multiple Choice

The Kimberly Corporation is a zero growth firm with an expected EBIT of $100,000 and a corporate tax rate of 30%. Kimberly uses $500,000 of 12.0% debt, and the cost of equity to an unlevered firm in the same risk class is 16.0%.
-Assume that the firm's gain from leverage according to the Miller model is
$126,667. If the effective personal tax rate on stock income is TS = 20%, what is the implied personal tax rate on debt income?

• A) 16.4%
• B) 18.2%
• C) 20.2%
• D) 22.5%
• E) 25.0%