true or false

A fact that tends to support the pecking order theory over the tradeoff model is that firms do tend to finance more new investments with debt rather than with retained earnings.

An unlevered firm generates a net operating profit each year in perpetuity of $2,200,000, and its investors require a return of 10%. The firm pays a corporate tax rate of 25%. If the company decides to issue $1,000,000 in bonds paying 5% interest and use the proceeds to retire some of the common stock, the firm's value will increase by $2,500,000.

Taking into account both personal and corporate taxes, when the gains from leverage are negative it means that the personal tax burden on interest income is so high that it swamps the double taxation of corporate income at both the firm level and the personal level.