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) Suppose corporate earnings are taxed at the corporate level (tax rate tc) and that...

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) Suppose corporate earnings are taxed at the corporate level (tax rate tc) and that earnings distributed to investors as income on equity are taxed privately (tax rate te) and earnings distributed to investors as income on debt are also taxed privately (tax rate to) but such income is tax deductible at the corporate level. Explain that in this case the value of a levered firm VL is equal to the value of an unlevered firm Vu plus the value of corporate debt D times a factor measuring the tax benefits of borrowing 1 - (1-tc)(1-te)/(1-td)

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