Given the Following Information, Leverage Will Add How Much Value

question 59

Multiple Choice

Given the following information, leverage will add how much value to the unlevered firm per pound of debt?
Corporate tax rate: 34%
Personal tax rate on income from bonds: 20%
Personal tax rate on income from shares: 50%

• A)£-0.050
• B)£-0.188
• C)£0.367
• D)£0.588
• E)None of the above.

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Definitions:

Economies of Scale

Economies of scale refer to the cost advantage achieved by an increase in production, which typically leads to a reduction in average cost per unit as scale increases.

Average Total Costs

Average total costs represent the total costs of production (fixed and variable costs combined) divided by the quantity of output produced.

Pure Nondiscriminating Monopolist

A market situation where a single seller sells a product to all buyers at the same price without price discrimination.

Allocative Efficiency

A state of the economy in which production represents consumer preferences; in particular, every good or service is produced up to the point where the last unit provides a utility to consumers equal to the cost of producing it.