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

question 26

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 PV of interest tax shield = T_c x D
• = )35 x $1,000,000
• = $350,000
• Value of levered firm = value of all-equity financed + present value of tax shield

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