You Need to Calculate the Gains from Using $1,000,000 of Additional

question 31

Multiple Choice

You need to calculate the gains from using $1,000,000 of additional leverage on the average company in the U.S.economy.You are told that the average investor's personal tax rate on income from stock is 15% and that investors can generally avoid personal taxes on income from debt.You are also told that the average corporation is subject to the 35% marginal corporate tax rate.What is the benefit to firm value for this additional debt load?

• A) $650,000
• B) $447,500
• C) $350,000
• D) none of the above

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Definitions:

Absorption Costing

A costing method that includes all manufacturing costs - direct materials, direct labor, and both variable and fixed manufacturing overhead - in the cost of a product.

Variable Costing

An accounting method in which variable manufacturing costs are included in product costs, while fixed manufacturing overhead is treated as an expense of the current period.

Net Operating Income

A financial metric that calculates a company's income after operating expenses are deducted, but before interest and taxes are subtracted.

Direct Material Cost

The expense of fundamental materials directly utilized in the production of a product.