In a world with only company-level taxation of operating profits,no costs of bankruptcy,and tax-deductible interest payments,what is the optimal corporate strategy?

Question

Quizplus · Accepted Answer

In this scenario, there are no costs of bankruptcy and tax-deductible interest payments, which means that the firm can maximize its value by using all debt to finance its operations. This is because interest payments are tax-deductible, and the more debt the firm has, the lower its tax liability will be. Additionally, since there are no costs of bankruptcy, the firm can take on as much debt as it wants without the risk of going bankrupt. Therefore, the optimal strategy for the firm would be to use all debt to finance its operations and maximize its value.

In a World with Only Company-Level Taxation of Operating Profits,no