Chapter 3

The amount of equity is given by . If Ms buy no bonds, the value of equity is. If Ms buy bonds, the value of equity is . Thus, the debt-equity ratio can range from $700 million / $800 million = 7/8 to $1,000 million / $500 million = 2. b. If the corporate tax rate is 30%, the equilibrium interest rate will be 8.57%. ................
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