What Is the Change in Value for a Firm with $1

question 68

Multiple Choice

What is the change in value for a firm with $1 million in equity, $1 million in permanent debt at a 10% interest rate, and a 35% tax rate if MM I is modified to recognize corporate taxes?

• A)value increases by $35,000
• B)value increases by $100,000
• C)value increases by $350,000
• D)value increases by $700,000

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Definitions:

Annual

Occurring once every year.

Absolute Value

The distance of a number from zero on the number line, without considering direction; always non-negative.

Solution

The number or collection of numbers that fulfill a given equation, inequality, or a set of equations.

Inequality

A mathematical statement that suggests a non-equivalence between two values or expressions.