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AQ&Q has EBIT of $2 million, total assets of $10 million, stockholders' equity of $4 million, and pretax interest expense of 10 percent.

A. What is AQ&Q's indifference level of EBIT?

B. Given its current situation, might it benefit from increasing or decreasing its use of debt? Explain.

C. Suppose we are told AQ&Q's average tax rate is 40 percent. How does this affect your answers to (a) and (b)?

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