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In class we held a discussion about a firm that was in financial distress, paid high property taxes, had a long term union contract with its workers, and was the defendant in a high profile lawsuit. In this example the firm was considering a project that had a small chance of a significant payout, but a large chance of returning zero. What was the justification of accepting the project and funding the project with new debt capital?
a. Debt is tax deductible and firms with leverage pay less in tax compared with unlevered firms.
b. Debt is easier to raise compared with equity, especially in this particular scenario.
c. Debt is a riskier form of capital compared with equity, so that the financing risk better matches the risk of the project.
d. Debt leads to better diversification for investors who wish to form medium sized portfolios.
e. Debt pays a fixed rate of interest, such that the project’s success would not have to be split with any new shareholders.
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