A Local Firm Has Debt Worth $200,000,with a Yield of 9%,and

question 5

Multiple Choice

A local firm has debt worth $200,000,with a yield of 9%,and equity worth $300,000.It is 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 is the value of your firm's tax shield,i.e.,how much value does the use of debt add?

• A) $92,571
• B) $102,857
• C) $113,143
• D) $124,457
• E) $136,903

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Definitions:

State Rate

A specific tax or fee rate determined by a state government, often applied to sales, income, or property.

Form 941

A tax form used by employers in the United States to report quarterly federal taxes withheld from their employees' earnings.

Social Security

A government program that provides financial assistance to people with insufficient or no income, mainly for the elderly, disabled, and survivors.

Medicare Taxes

Taxes collected from earnings to fund the Medicare program, which provides health insurance for individuals aged 65 and older in the United States.