Combination of tax-deductibility and old tax-rate

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Reference no: EM131336093

In the Netherlands the corporate tax rate is 25.5%. Suppose each and every year the EBIT of a firm is X million (X>0) and the constant annual interest-payments equal μ*X million, where 0<μ<1.

Now suppose the Dutch government wants to decrease the corporate tax-rate while simultaneously abolishing tax-deductibility of interest-payments.

[a] For which new corporate tax-rate will this particular firm be indifferent between the combination of tax-deductibility and the old tax-rate (of 25.5%) on the one hand and the new tax-rate on the other hand?

Suppose tax-deductibility is abolished and the corporate tax-rate remains 25.5%.

[b] Will this be disadvantageous for shareholders, for bondholders or for both?

Reference no: EM131336093

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