Consider the Modigliani and Miller world of corporate taxes. An unleveraged (all-equity) firm value is $100 million
By adding debt, the annual interest expense is $10 million, the corporate tax rate is 40%, and the discount rate on the tax shield is 10%. What is the value of the firm after adding debt?
A) $100 million
B) $120 million
C) $140 million
D) $160 million
Answer: C
Explanation: C) We first compute the tax shield:
= = $40 million.
We can now compute firm value:
VL = VE + Tax Shield = $100 million + $40 million = $140 million.
You might also like to view...
When a bank collects a note for the holder, it notifies the holder on a form called a
a. debit advice. b. proceed report. c. collection report. d. credit advice.
When using the direct charge-off method, year-end adjustments for uncollectible accounts expense must be made
Indicate whether the statement is true or false
It is necessary for an organization to define its processes before attempting to establish relationships among company activities
Indicate whether the statement is true or false
Which one of the steps below is not aided by the preparation of the work sheet?
A) preparing the adjusted trial balance B) posting to the general ledger C) preparing the financial statements D) preparing the closing entries