## Answers

1)

with corporate taxes as the only market imperfection,

let the tax rate = t

operating income of the firm = O

cost of capital for firm without leverage = r

let value of firm without leverage = v = [O*(1-t)/r]

amount of debt with the company = d

the value of firm with leverage = v+ (t*d)

hence in this case value of firm with leverage > value of firm without leverage

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