Firm L Has Debt with a Market Value of $200,000

question 1

Multiple Choice

Firm L has debt with a market value of $200,000 and a yield of 9%. The firm's equity has a market value of $300,000, its earnings are 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 would Firm L's total value be if it had no debt?

• A) $358,421
• B) $377,286
• C) $397,143
• D) $417,000
• E) $437,850

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Definitions:

Externalities

Economic side effects or consequences that affect uninvolved third parties; can be positive or negative.

Cap-And-Trade

An environmental policy mechanism that sets a cap on emissions and allows businesses to buy and sell permits for the right to emit.

Carbon Tax

A tax imposed on the carbon content of fuels to mitigate environmental impacts of carbon dioxide emissions.

Carbon Dioxide Emissions

Carbon dioxide emissions are the release of CO2 into the atmosphere, primarily from burning fossil fuels, which contribute to global warming and climate change.