Million of equity into debt

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Suppose that JudyLee Manufacturing is currently all-equity financed, has an EBIT of $2 million and is in the 34 percent tax bracket. Judy, the company's founder, is the lone shareholder. All earnings are paid out as dividends to Judy. A financial adviser for the firm suggests that If the firm were to convert $4 million of equity into debt at a cost of 10 percent, will you accept this advice? Explain why or why not.

Reference no: EM132557273

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