Taxoginia has the tax system as below:
The business interest payment is tax deductible; the imputed interest of capital investment by owner(s) or holder(s) of common stock is tax deductible.
Taxoginia government provides a deduction for business interest expense as well as allows corporations to deduct the entire cost of the asset in the year the investment is made.
Taxoginia government provides an investment tax credit (ITC) that allows firms to deduct 10% of their annual investment expenditures from the taxes they owe.
Taxoginia income tax is a very progressive one.
Interest income is twice as much as earned income.
Capital gains and dividends earned by investors are taxed with the same rate as the interest income tax.
Suppose Taxoginia government decides to cut down the corporate tax rate by half. How does the policy decision affect a firm’s financial structure (debt-to-equity ratio)? (20 points)
Note: Include the firm’s financing decision to support your argument