Assume the corporate tax rate is 50 percent, AAA corporate bonds are trading at a yield of

Question:

Assume the corporate tax rate is 50 percent, AAA corporate bonds are trading at a yield of 9 percent, and municipal bonds are trading at a yield of 6 percent. How can the shareholders of an AAArated firm gain by increasing the leverage of their firm without increasing the leverage of their personal portfolio? Assume the probability of bankruptcy is zero.

AppendixLO1

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