Exhibit 17.1 Eccles Inc., a Zero Growth Firm, Has an Expected EBIT

Exhibit 17.1
Eccles Inc., a zero growth firm, has an expected EBIT of $100,000 and a corporate tax rate of 30%. Eccles uses $500,000 of 12.0% debt, and the cost of equity to an unlevered firm in the same risk class is 16.0%.
-Refer to Exhibit 17.1.Assume that the firm's gain from leverage according to the Miller model is $126,667.If the effective personal tax rate on stock income is T_S = 20%,what is the implied personal tax rate on debt income?

A) 16.4%
B) 18.2%
C) 20.2%
D) 22.5%
E) 25.0%

Correct Answer:

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