Question: ACE Corp. has identified two alternative capital structures. If the firm borrows 25% of the value of the firm, it can borrow the money at

ACE Corp. has identified two alternative capital structures. If the firm borrows 25% of the value of the firm, it can borrow the money at r_d= 9% and the shareholders will have a required return of r_e=17%. If the firm borrows 50% of the value of the firm it can borrow money at r_d=11% and shareholders will have a required return of r_e=20.82%. ACE pays corporate taxes at the rate of 40%. Which captial struture should ACE adopt? If ACE is operating in an essentially perfect captial market except for taxes, are the taxes approximately symmetric or asymmetric?

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