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Consider a situation in which the corporate tax rate is 40%, the interest income tax rate is 40% and capital gains and dividend tax rates
Consider a situation in which the corporate tax rate is 40%, the interest income tax rate is 40% and capital gains and dividend tax rates are both 20%. The unlevered cost of capital of the firm is 8% and its cost of debt is 5%. The firms EBIT can take two values: 500 with probability 50%, and 40,000 with probability 50%. After this period the firm dies (only consider one period). The debt-to-value ratio that maximizes firm value is closest to?
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