Question: [2] Explain how EXAMPLE 16.7 is used to explain the agency cost of leverage - the leverage ratchet effect, using the information in the example

[2] Explain how EXAMPLE 16.7 is used to explain the agency cost of leverage - "the leverage ratchet effect," using the information in the example problem. (7 points) Debt Overhang and the Leverage Ratchet Effect Problem Show that Baxter's shareholders would not gain by reducing leverage from $1 million to $400,000, even though firm value would increase by eliminating the cost of underinvestment

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