It is December 2017. A change in tax regulation decreasing the corporate income tax rates by 14% is being contemplated. As a result, the highest marginal corporate income tax rate is expected to decrease from 35% to 21%.

What effect does this change in tax regulation have on the value of a levered firm (i.e., a firm with debt in its capital structure) whose current marginal corporate income tax rate is 35%? Explain why?

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The change in tax regulation decreasing the corporate income tax rates from 35 to 21 is likely to ha... View the full answer