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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Equal Pay Act

A law aimed at abolishing wage disparity based on sex by ensuring equal pay for equal work among men and women.

Seniority System

A system in which those who have worked longest for an employer are first in line for promotions, salary increases, and other benefits, and are last to be laid off if the workforce must be reduced.

Compensatory Damages

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