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 a world with no costs of bankruptcy and tax-deductible interest payments, using all debt would minimize the firm's tax burden and maximize its value. This is because interest payments are tax-deductible, so using debt financing would achieve higher tax savings and increase the value of the firm. Using equity, on the other hand, would result in no leverage, and preferred stock would not provide the same tax advantage as debt.

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