In a world with corporate taxes and bankruptcy costs,

Name: In a world with corporate taxes and bankruptcy costs,
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Question

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In a world with corporate taxes and bankruptcy costs, the firm should borrow to the point where the marginal benefits of debt equal the marginal costs. This is because debt provides a tax shield, reducing the firm's tax liability, while at the same time increasing bankruptcy costs. The optimal level of debt is therefore where the tax shield benefit equals the increased cost of bankruptcy.

In a World with Corporate Taxes and Bankruptcy Costs