How does the agency problem impact the financing choices of a firm. Specifically, what are the implications of debt financing? $(5$ marks$)$

Part B

A firm has a unique and innovative business model. The financial market is struggling to understand the full implications of the business model for future profitability and hence is undervaluing the firm. The top management is worried that the low value of the company's shares may trigger a takeover bid by rivals. Explain how the firm may use debt or borrowing as a signal by the top management of the expected future profits of the firm and protect the firm from a hostile takeover bid. $(5$ marks$).$