Suppose a firm has a defined benefit pension plan and faces a marginal tax rate on ordinary income of 35%. The firm can earn or issue fully taxable bonds that yield 12% and can purchase stock yielding...

Suppose a firm has a defined benefit pension plan and faces a marginal tax rate on ordinary income of 35%. The firm can earn or issue fully taxable bonds that yield 12% and can purchase stock yielding 18%. The firm faces an annualized corporate tax rate, tcs, of 25% on stock investments. Describe and illustrate the tax benefits to the Black–Tepper arbitrage strategy for this firm.