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Oak Farms is an unlevered firm with 3055 shares outstanding and an EBIT of 700. Corporate earnings are taxed at a rate of 37%. Suppose
Oak Farms is an unlevered firm with 3055 shares outstanding and an EBIT of 700. Corporate earnings are taxed at a rate of 37%. Suppose that Oak Farms makes a decision to partition (split) its assets into debt and equity. The firm issues $1750 of debt at a cost of 8.15%, and uses these funds to reduce the amount of equity on its books. The partition does not change the EBIT or the tax rate, but does reduce the number of shares outstanding to 2305
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