Tool Manufacturing has an expected EBIT of $42,000 in perpetuity and a tax rate of 35%. The firm has $70,000 in outstanding debt at an interest rate of 8 percent, and its unlevered cost of capital is 15 percent. What is the value of the firm according to MM Proposition I with taxes? Should Tool change its debt-equity ratio if the goal is to maximze the value of the firm? Explain.
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