Question: Suppose a firm has a defined benefit pension plan and faces a marginal tax rate on ordinary income of 35%. The firm can earn or

Suppose a firm has a defined benefit pension plan and faces a marginal tax rate on ordinary income of 35%. The firm can earn or issue fully taxable bonds that yield 12% and can purchase stock yielding 18%. Describe and illustrate the tax benefits to the Black–Tepper arbitrage strategy for this firm assuming the firm pays no tax on the stock investment yielding 18%. Explain your results.

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