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You work for a firm that is very good at sheltering income from corporate taxes. As a result, your firm as a fairly low effective

You work for a firm that is very good at sheltering income from corporate taxes. As a result, your firm as a fairly low effective corporate tax rate of 10 percent. The debt holders of your firm face a marginal tax rate on interest income (from debt payments) of 20percent. Your shareholders face a tax rate on capital gains and distributions to equity of 10 percent. In the event of a bankruptcy, your bankruptcy costs will be about 5 percent of the value of the assets that remain. Should you have a lot, a little, or no debt in your capital structure? Explain why.

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