Government increased the corporate tax rates

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Reference no: EM132061298

1. Suppose you open today (year 0) a savings account with $5,000; the account earns an interest of 4% annually. At year 2 you deposit an additional $10,000 in the savings account, and at year 8 you deposit another $15,000 in the account. What is the balance in the account at the end of year 10?

A. $19,136 B. $25,206 C. $34,910 D. $37,311

2. If the U.S. government increased the corporate tax rates:

a. we would expect no change in the capital structure since it is independent of the component costs of capital.

b. we would expect to see higher levels of equity since there would be less of a tax advantage for debt.

c. we would expect to see higher debt levels since debt would become cheaper relative to equity.

d. We would expect to see higher percentages of preferred stock since 70 percent of dividends are not taxed by corporations.

3. An all-equity financed firm has $6m in assets and the stock price is $200. If the firm restructures with 40 percent debt which creates interest expense of $240,000 per year and the firm's tax rate is 40 percent, what is the break-even EBIT?

$336,000

$380,000

$432,000

$600,000

Reference no: EM132061298

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