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The following market imperfections provide reasons why shareholders of an all-equity firm may gain if the firm issues new debt at fair market prices and

The following market imperfections provide reasons why shareholders of an all-equity firm may gain if the firm issues new debt at fair market prices and uses the proceeds to repurchase the stock:

a. Market participants know that managers will engage in value-destroying risk-shifting if they have the opportunity to do so.

b. Positive personal taxes on dividend income.

c. An agency problem leads managers to waste excess cash.

d. None of the above.

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