Assume that the tax rate is 34% and bankruptcy costs are negligible until a firm's debt to equity ratio is greater than one. If Madison Co. increases debt from 10% of its capital structure to 40%, cash flows to investors will

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With an increase in debt, the tax shields from interest payments also increase, resulting in an increase in cash flows to investors. Additionally, since the debt to equity ratio is still less than one, there are no bankruptcy costs. Therefore, the increase in debt will result in an increase in cash flows to investors.

Assume That the Tax Rate Is 34% and Bankruptcy Costs