Suppose That a Company Can Direct $1 to Either Debt

Multiple Choice

Suppose that a company can direct $1 to either debt interest or to capital gains for equity investors. The capital gains tax rate is 15 percent. Which investor would not care how the money is channeled? (The marginal corporate tax rate is 21 percent.)

A) Investors paying zero personal tax
B) Investors paying a personal tax rate of 53 percent
C) Investors paying a personal tax rate of 17.5 percent
D) Investors paying a personal tax rate of 33 percent