How does the value of an unlevered firm change if it takes, Ask an Expert

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How does the value of an unlevered firm change if it takes on debt in the presence of corporate taxes? Repeat the analysis for ANF from the previous problem, after relaxing only the "no corporate tax" assumption of perfect capital markets.

Use the average tax rate (income taxes divided by pretax income from the income statement) for the latest available year. What is the value of ANF after it issues debt? What is the benefit of issuing debt when there are corporate taxes? How will the beta for a levered ANF, in the presence of corporate taxes, compare to that of an all-equity ANF and that of a levered ANF, in perfect capital markets?

When capital markets are perfect, except for corporate taxes, what is the optimal level of debt the company should issue? In reality, do we observe firms that maintain this optimal level of debt? Why or why not?

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Category:- Basic Finance
Reference No.:- M92082325

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