If the only violation of the M&M assumptions is that investors face one tax rate for interest income

Aug 17th, 2016
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If the only violation of the M&M assumptions is that investors face one tax rate for interest income and another tax rate for equity income, what is the implication for the optimal capital structure of a corporation? Please I need you to include references, and uses of own word.

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Answer--------personal opinionThus far we ignored personal taxes altogether and showed that in the presence of corporate taxes,firmsWould be interested in issuing as much debt as they possibly can. However, in a world with personalTaxes, it is reasonable to assume that investors will be interested in after personal tax cash flows.Consequently, the tax advantage of debt at the corporate level should be traded-off against thepossibleTax disadvantage of debt at the personal level. Our discussion on this topic we considers the trade-offbetween the tax advantage Of debt at the corporate level and the tax disadvantage at the personal leveland examines the implications Of this trade-off for optimal capital structure. Our conclusion is that solong as there is a continuum Of investors with varying marginal rates of personal taxes, capitalstructure will be irrelevant, because in Equilib

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