Suppose That a Company Can Direct $1 to Either Debt

question 68

Multiple Choice

Suppose that a company can direct $1 to either debt interest or capital gains for equity investors.If there were no personal taxes on capital gains,which of the following investors would not care how the money was channeled? (The marginal corporate tax rate is 35%.)

• A)investors paying personal tax of 17.5%
• B)investors paying personal tax of 35%
• C)investors paying personal tax of 53%
• D)tax-exempt personal investors

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Definitions:

Variable Costs

Expenses that fluctuate with the level of output or sales, such as raw materials and direct labor, making them distinct from fixed costs.

Break-even Point

The point at which total revenues equal total expenses, resulting in no profit or loss for the business.

Unit Variable Cost

The cost associated with producing one additional unit of a product, which typically includes materials and labor.

Fixed Costs

Expenses that do not change with the level of production or sales activity, such as rent, salaries, and insurance premiums.