Assume perfect capital markets, with the exception of positive corporate taxes (that is, the assumptions of Modigliani & Miller with corporate taxes are satisfied). Suppose that a firm issues equity and uses the proceeds to reduce its level of debt outstanding. After this transaction is completed, total firm value will be...

a.lower, if the firm loses interest tax shields it would have used otherwise.

b.higher, because the expected return on debtr_ddeclines.

c.higher, because the expected return on equityr_edeclines.

d.(a), (b), and (c)

e.(a) and (b)

f.(a) and (c)

g.(b) and (c)

h.None of the above.