A Firm Has an Operating Profit of $300,000, Interest of $35,000

question 74

Multiple Choice

A firm has an operating profit of $300,000, interest of $35,000, and a tax rate of 40 percent. The firm has an after-tax cost of debt of 5 percent and a cost of equity of 15 percent. The firm's target capital structure is set at a mix of 40 percent debt and 60 percent equity. According to the traditional approach to capital structure, the value of the firm is

• A) $1.4 million.
• B) $6.0 million.
• C) $2.7 million.
• D) $2.0 million.

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Definitions:

Consumer Price

The price that end-users or consumers pay for goods or services, including taxes and distribution expenses.

More Elastic

Refers to a situation where the quantity demanded or supplied of a good or service is more sensitive to changes in price.

Municipal Swimming Pool

A public swimming facility maintained by a local government for the use of its residents.

Entrance Fees

Entrance fees are charges that individuals must pay to gain access to a facility, event, or organization.