Question: Your cousin has just started his MBA and is confused
Your cousin has just started his MBA and is confused. He understands that without taxes, capital structure is irrelevant. He also understands that with taxes, firms should use 100 per-cent debts. However, his professor is saying that with taxes, there are times that the investor will prefer an unlevered firm. How is this possible? Assume that there is no bankruptcy cost, information asymmetry, or agency problems. Assume that there is personal tax.
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