Suppose there are two firms A and B. Both firms operate in the same industry and are exactly same as each other except for one aspect: Firm A is financed entirely with equity, but firm B is financed with half equity and half debt.

-Suppose the two companies are exempt from taxes, and there are no bankruptcy/agency cost. Which firm should have higher firm value and why?

-Suppose now the government starts to tax the two firms with 40% tax rate. Which firm should be valued higher and why?

- Suppose now that the bankruptcy costs are also introduced to the economy. But there is still no agency cost. Which firm should be valued higher and why?

- Suppose now there is agency costs also. Which firms should be valued higher and why?