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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Definitions:

Business Proposal

A document designed to offer specific goods or services to a potential buyer or client.

Overhead Costs

The ongoing expenses not directly attributed to creating a product or service but necessary for running a business, such as rent, utilities, and administrative salaries.

Budget

An estimate of income and expenditure for a set period of time, often used for planning and managing finances.

Statement Of Needs

A documented expression of the requirements or necessities that a project, proposal, or program aims to address or fulfill.