14.11. X-Tex Industries has large depreciation tax deductions and can thus eliminate all of its taxable income

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14.11. X-Tex Industries has large depreciation tax deductions and can thus eliminate all of its taxable income with a relatively small amount of debt. In contrast, Unique Scientific Equipment Corporation is generating a substantial amount of taxable income. Despite the tax advantage of debt, Unique uses only a modest amount of debt financing because the nature of its products would make financial distress very costly. Suppose the rate of inflation increased from 3 percent to 6 percent, increasing borrowing rates from 6 percent to 9 percent. How would this affect the optimal capital structures of these two firms?

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Financial Markets And Corporate Strategy

ISBN: 9780071157612

2nd Edition

Authors: Mark Grinblatt, Sheridan Titman

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