ABSTRACT The paper shows that the use of an equity participation loan has no effect on the value of the firm, and that taxation of the borrowing firm and lender reduces firm value. The paper includes the assumption that firms borrow at an interest rate that is greater than the rate at which they can lend, so the value of the firm declines with the amount borrowed. Also, it is assumed that the firm may go bankrupt, which introduces the need for financial intermediation, as discussed by McDonald . A state-preference model is employed.
Cite this paper
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