Proposition i with corporate taxes firm value increases, Ask an Expert

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Proposition I (with Corporate Taxes) Firm value increases with leverage VL = VU + TC B

Proposition II (with Corporate Taxes) Some of the increase in equity risk and return is offset by the interest tax shield 5.

Based on the second proposition, what should happen to a firm’s weighted average cost of capital as it increases the percentage of debt in its capital structure but remains below the optimal amount of debt? Explain why it happens.

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Financial Management, Finance

Category:- Financial Management
Reference No.:- M91590366

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