tate the effect on the market value of the firms levered assets (), cost of debt , cost of equity , weighted average cost of capital after tax, weighted average cost of capital before tax, and market value of levered equity while assuming a corporate tax rate of 30% no transaction costs, no asymmetric information (so ignore signalling effects), and no change in the credit risk of the firm's debt.

Firm value Cost of debt Weighted average cost of capital (after tax) Weighted Market Value of average cost of Firm's Equity (EU capital (before tax) V ID Issues shares and uses the proceeds to invest in a positive NPV project with a higher systematic risk than the firm's usual 4 investments Increase Decrease Unchanged issues fixed-coupon bonds and uses the proceeds to repurchase shares. + The corporate tax rate suddenly increases by a material amount Conducts a 3-for-1 rights issue at a significant discount to the current market share price invests in a lower than average risk project with a positive NPV, funded half with a bank loan and half with a share issue Unexpectedly generates larger than usual cash flows and uses those cash flows to repay debt. Conducts a 2 for 1 share + . 4 split Firm value Cost of debt Weighted average cost of capital (after tax) Weighted Market Value of average cost of Firm's Equity (EU capital (before tax) V ID Issues shares and uses the proceeds to invest in a positive NPV project with a higher systematic risk than the firm's usual 4 investments Increase Decrease Unchanged issues fixed-coupon bonds and uses the proceeds to repurchase shares. + The corporate tax rate suddenly increases by a material amount Conducts a 3-for-1 rights issue at a significant discount to the current market share price invests in a lower than average risk project with a positive NPV, funded half with a bank loan and half with a share issue Unexpectedly generates larger than usual cash flows and uses those cash flows to repay debt. Conducts a 2 for 1 share + . 4 split