The Change in Firm Value Due to Infusion of Debt

question 9

Multiple Choice

The change in firm value due to infusion of debt in the presence of corporate taxes is:

• A) positive as equity holders face a lower effective tax rate.
• B) positive as equity holders gain the tax shield on the debt interest.
• C) negative because of the increased risk of default and fewer shares outstanding.
• D) negative because of a reduction of equity outstanding.

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Definitions:

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State and Federal Laws

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Business Conduct

The standards, values, and practices that guide the actions of businesses in their pursuit of economic and social performance.

Restraints of Trade

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