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.

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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 TS =20%, what is the implied personal tax rate on debt income?

A. 18.2%

B. 16.4%

C. 20.2%

D. 22.5%

E. 25.0%

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