Soonerco has $15 million of common stock outstanding, net operating income of $2.5 million per year, and $15 million of debt outstanding, with a required return (interest rate) of 8 percent. The required rate of return on assets in this industry is 12.5 percent, and the corporate tax rate is 35 percent.
Within the M&M framework of corporate taxes but no personal taxes, determine the present value of the interest tax shield of Soonerco, as well as the total value of the firm.
Finally, determine the gain from leverage if personal taxes are levied at the rates of 15 percent on stock income and 25 percent on debt income.