Reference no: EM132414202

In Fantastic Biz, both dividend and interest income are taxed at the same rate. A new tax law is passed that increases both corporate and personal tax rates. What effect will this likely have on the capital structure decision of the nation's firms?

Which of these answers is true?

1. Since both debt and equity income are taxed at the same rate, the optimal capital structure for most firms will be 50% debt and 50% equity when personal taxes are taken into consideration

2. Firms will use more equity in their capital structure

3. There will be no change in the capital structure of the nation's firms since both corporate and personal tax rates have increased

4. Firms will use more debt in their capital structure.