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

question 32

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:

Internal Rate of Return

The discount rate that makes the net present value (NPV) of all cash flows (both positive and negative) from a particular project or investment equal to zero.

Required Return

The smallest percentage of annual gain required from an investment to attract individuals or corporations to fund a certain project or venture.

Wealth

The abundance of valuable financial assets or physical possessions which can be converted into a form that can be used for transactions.

Discounted Payback

The period of time it takes for the sum of the discounted cash flows to pay back the initial investment.