Jeff started an Internet company, Finstrat.com, which, unlike others in the industry, generated taxable earnings almost immediately. Jeff owns 10 percent of the shares, and the rest of the shares are held by tax-exempt institutions. The firm needs to raise $100 million in new capital. Jeff would like to see the firm issue equity and would be willing to purchase $10 million of the new equity to keep his ownership stake constant. However, the institutions would like to see the firm raise the capital through debt. Explain how part of this disagreement might be related to taxes.

AppendixLO1