When Financial Distress Is a Possibility, the Value of a Levered

question 7

Multiple Choice

When financial distress is a possibility, the value of a levered firm is a function of:
I.value of the firm if all-equity-financed;
II.present value of tax shield;
III.present value of costs of financial distress;
IV.present value of omitted dividend payments

• A)I only
• B)I + II
• C)I + II − III
• D)I + II - III − IV

---

Definitions:

Line of Credit

A flexible loan from a bank or financial institution that offers a borrower a maximum amount of money they can borrow over a specified time period.

Receivable Financing

A financing arrangement where a business uses its accounts receivable as collateral for a loan, improving cash flow.

Commercial Banks

are financial institutions that offer a wide range of services such as accepting deposits, providing business and personal loans, and other financial products and services to the public.

Financial Track Records

Documentation or history that shows the financial performance and health of a company or individual over time.