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OB is false. Hope that answers your question
Suppose an unlevered firm issues $1000 in debt at a cost of debt of 10%. If the corporate tax rate is 20%, $200 t is the change in the firm's value.
Due to the issue of the corporate tax rate is entitled to Interest Tax Shield assuming Debt issued by the firm is perpetual and ignoring financial distress costs
Change in Value of firm
=Net Effect of Debt Financing
=Present Value of Interest Tax Shield (financial distress costs ignored)
= DebtValue * Cost of Debt * Tax Rate Interest Rate
= $1,000 * 10% * 20% 10%
=$200,
corporate tax rate, also known as corporate income tax or corporate tax, is a direct tax levied on the income or capital of a corporation or similar corporation. Many countries impose such taxes at the national level, and similar taxes may be levied at the state or local level.
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A tax cut that will last for only a year will not have a huge effect on the aggregate demand as the aggregate demand increases only when the tax cut is permanent.
The given statement is false.
<h3>What is a tax?</h3>
A tax is a liability imposed on the taxpayer to pay a specified sum to the government based on the income they have earned in the previous year.
When the cutting of taxes becomes permanent in the country, then the citizens can start to acquire more which will increase the spending. The families will expect that the tax cuts are for the longer term which now induces them to buy and spend more and also act as an addition to their incomes. This whole impact would eventually lead to rising in aggregate demand.
Therefore, the demand increases when the tax cuts are permanent rather than when tax cuts are for only one year.
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Answer and Explanation:
An investment when it would be risk free in that case both the principal and the interest amount are to be paid within the prescribed time. Also when the U.S government bonds i.e. long term would be issued by the government have a lesser interest rate as compared with the other riskier securities available at the market place this is because as the government would default next to zero in case of the short term it would make the default when there are extreme situations arise.
Therefore in the short term it would be risk free
But in the long run, the person is based on the treasury bills returns so that he or she could equate the similar standard of living also it would not suffice when the inflation rises
Therefore the less risky investment would be of Government bonds
