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Intermediate
A profitable insurer can issue 100 million of perpetual debt at 6%. The corporate tax rate is 21%. Ignoring distress and agency costs, what value effect does MM with corporate taxes predict?
1.26 million, equal to the first year's interest tax saving.
6.00 million, equal to the annual interest expense.
21.00 million, equal to the corporate tax rate times permanent debt.
100.00 million, because debt proceeds increase firm value dollar for dollar.
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