Use the Information for the Question(s) Below

question 66

Multiple Choice

Use the information for the question(s) below.
Shepard Industries expects free cash flow of $10 million each year. Shepard's corporate tax rate is 35%, and its unlevered cost of equity is 10%. The firm also has outstanding debt of $40 million and it expects to maintain amount of debt permanently.
-Assume that the corporate tax rate is 40%,the personal tax rate on income from equity is 20% the personal rate on interest income is 36%.The effective tax advantage of a corporate issuing debt would be closest to:

• A) 10%
• B) 15%
• C) 25%
• D) 28%

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Definitions:

Discount Rate

The applied rate in discounted cash flow studies for turning future cash flows into their equivalent present-day financial value.

Cash Inflows

Money received by a business from its operations, investments, or financing activities.

Discount Factor

A multiplier used to calculate the present value of future cash flows; reflects the time value of money.

Invested Today

Refers to the allocation of resources, such as capital or time, in the present with the expectation of future returns.