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The market value of EEL Ltd's equity is $50 million and it has $50 million debt. Management intends to issue bonds $20 million worth of
The market value of EEL Ltd's equity is $50 million and it has $50 million debt. Management intends to issue bonds $20 million worth of bonds and use the proceeds to repurchase some outstanding shares. Examine whether the value of EEL will increase or decrease under the following scenarios: (i) no corporate tax and no bankruptcy costs, (ii) corporate tax rate is 17% and no bankruptcy costs and (iii) corporate tax rate is 17% and with bankruptcy costs.
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