Consider the Modigliani and Miller world of corporate taxes. An unlevered (all-equity) firm value is $500 million
By adding debt, the annual interest expense is $100 million, the corporate tax rate is 30%, and the discount rate on the tax shield is 8%. What is the value of the firm after adding debt?
A) $500 million
B) $875 million
C) $938 million
D) $1,000 million
Answer: B
Explanation: B) We first compute the tax shield:
= = $375 million.
We can now compute firm value:
VL = VE + Tax Shield = $500 million + $375 million = $875 million.
You might also like to view...
EDI trading partner agreements specify all of the following except
a. selling price b. quantities to be sold c. payment terms d. person to authorize transactions
Answer the following statements true (T) or false (F)
Disclosure will become less important in the future because of market efficiency.
A strategy is a(n):
A) set of opportunities in the marketplace. B) broad statement of purpose. C) simulation used to test various product line options. D) plan for cost reduction. E) action plan to achieve the mission.
Whether a contract's limitation-of-liability clause will be enforced depends on the type of breach that is excused by the provision
Indicate whether the statement is true or false