What prevents a firm from taking on high levels of debt

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(a) Modigliani and Miller showed that when firms have to pay taxes, a firm's value increases with leverage. Briefly discuss what prevents a firm from taking on high levels of debt.

(b) Maturity Rating Features

Bond A 10 years AA Put provision

Bond B 10 years A Call provision

Appraise which bond has the higher yield to maturity.

(c) Your company buys from a supplier who offers credit terms of 3/10 net 130. Discuss whether your company should or should not pay cash for the goods it buys if it can borrow funds from the bank at 10% per annum. (Use a 360-day year for your computations.)

Reference no: EM132700750

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