Company total effective tax rate
Course:- Finance Basics
Reference No.:- EM131007496

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Ed Fletcher is planning to start a business in corporate form that requires an investment of $500,000. He has that much money, but he can also borrow virtu- ally the whole amount from a rich relative. (This is very unusual.) Ed feels that after the business is started, it will be important to retain as much money in the company as possible to fund growth. Nevertheless, he plans to pay the investor, either himself or his relative, a $50,000 return (10% of the amount invested) each year. That's about as much as could be earned elsewhere. Considering cash reten- tion only, should Ed borrow or invest his own money? That is, which option will result in keeping more money in the company available to grow the business? How much more? The company's total effective tax rate will be 40%.

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