You Have Collected the Following Information for Your Firm

question 15

Multiple Choice

You have collected the following information for your firm: Your firm is contemplating increasing its debt by $100 million and using the funds to repurchase $100 million in equity. The debt would be perpetual and would have a perpetual
Expected return of 8.5%. The firm's current marginal tax is also expected to be permanent.
What will this change do to the value of the firm?

• A)It will decrease firm value by $20 million.
• B)It will increase firm value by 35 million.
• C)It will increase firm value by $140 million.
• D)It will decrease firm value by about $12 million.

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Definitions:

Inconsistent Over Time

Refers to situations where behavior, performance, or conditions change and do not follow a constant pattern across different periods.

Microeconomic Principles

The study of individual, household, and firm behaviors in decision-making and allocation of resources, often in markets where goods or services are bought and sold.

Preferred Spending

Often refers to the prioritization of budget allocation by individuals, businesses, or governments, favoring certain categories or sectors over others.

Canoeing and Kayaking

Recreational or competitive water sports involving navigating waterways in small, narrow vessels.