How Much Debt Is Outstanding in a Firm That Has

question 91

Multiple Choice

How much debt is outstanding in a firm that has calculated the present value of a perpetual tax shield to be $300,000 if the tax rate is 35% and the debt carries a 10% rate of return?

• A)$300,000
• B)$857,143
• C)$3,000,000
• D)$3,750,000 PV tax shield =
• $300,000 =
• 30,000 = 28.5714D

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Definitions:

Assumptions

Premises or conditions accepted as true without proof, used as a foundation for reasoning or calculations.

NPV

Net Present Value, a financial metric used to evaluate the profitability of an investment or project by calculating the difference between the present value of cash inflows and outflows.

Market Size

An estimate of the total demand or volume of sales for a particular product or service within a given market or geographic area.

R&D Costs

Expenses associated with the research and development activities of a company, aiming at new product development or improvement of existing products and processes.