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:

Net Present Value

The difference between the present value of cash inflows and the present value of cash outflows over a period of time, used in capital budgeting to assess the profitability of investments.

Working Capital

The difference between a company's current assets and current liabilities, indicating the short-term liquidity and operational efficiency.

Discount Rate

In discounted cash flow analysis, it's the rate employed to calculate the present value of anticipated cash flows.

Net Present Value

The discrepancy between the current value of incoming cash and the current value of outgoing cash throughout a given timeframe.