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Your company has EBIT of $2,000,000 each year, debt of $10,000,000, a cost of capital of 10 percent, and a corporate tax rate of 20
Your company has EBIT of $2,000,000 each year, debt of $10,000,000, a cost of capital of 10 percent, and a corporate tax rate of 20 percent. The personal tax rate on bond income is 40 percent and the personal tax rate on stock income is 10 percent. A leveraged buyout firm has just bought your company and the new CFO wants to increase the amount of firm debt to increase the firms value. Do you agree (show calculations)? Briefly explain why or why not.
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