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Alpha Co. has an expected EBIT of $130,000 in perpetuity and tax rate of 40%. The firm is paying 9% interest for $220,000 outstanding amount

Alpha Co. has an expected EBIT of $130,000 in perpetuity and tax rate of 40%. The firm is paying 9% interest for $220,000 outstanding amount of debt. Unlevered cost of capital is 12%.

Under the Modigliani and Miller approach (Case II, Proposition I with taxes), explain how the firm can increase its value using the financial leverage? And explain the reason behind that?

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