(26–9)

MM with and without Taxes International Associates (IA) is about to commence operations as an international trading company. The firm will have book assets of $10 million, and it expects to earn a 16%

return on these assets before taxes. However, because of certain tax arrangements with foreign governments, IA will not pay any taxes; that is, its tax rate will be zero. Management is trying to decide how to raise the required $10 million. It is known that the capitalization rate rU for an all-equity firm in this business is 11%, and IA can borrow at a rate rd = 6%. Assume that the MM assumptions apply.