Your Firm Has Debt Worth $200,000, with a Yield of 9

question 31

Multiple Choice

Your firm has debt worth $200,000, with a yield of 9%, and equity worth $300,000. It is growing at a 5% rate, and its tax rate is 40%. A similar firm with no debt has a cost of equity of 12%. Under the MM extension with growth, what is the value of your firm's tax shield, i.e., how much value does the use of debt add?

• A) $92,571
• B) $102,857
• C) $113,143
• D) $124,457
• E) $136,903

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Definitions:

Negative Relationship

A relationship between two variables in which an increase in the value of one variable is associated with a decrease in the value of the other variable. It is illustrated by a curve that slopes downward from left to right.

Quantity Demanded

The aggregate quantity of a product or service that buyers are prepared to buy at a specified price point.

Quantity Demanded

The aggregate demand for a product or service, defined as the overall quantity that buyers are ready and capable of buying at a specific price point in the marketplace.

Quantity Demanded

The complete sum of a certain good or service that consumers are ready and capable of buying at a determined price level.