Given the Following Information,leverage Will Add How Much Value to the Unlevered

question 33

Multiple Choice

Given the following information,leverage will add how much value to the unlevered firm per dollar of debt?
Corporate tax rate: 34%
Personal tax rate on income from bonds: 20%
Personal tax rate on income from stocks: 0%

• A) $0.175
• B) $0.472
• C) $0.528
• D) $0.825
• E) None of these.

---

Definitions:

M&M Proposition I

A principle of corporate finance stating that the value of a firm is unaffected by how it is financed, in the absence of taxes, bankruptcy costs, and asymmetric information.

Interest Tax Shield

The reduction in income taxes that results from taking allowable deductions for interest expenses.

Capital Structure

The mix of different forms of external financing used by a company, including debt, equity, and hybrid securities.

Tax Shield

The decrease in income tax liability achieved by subtracting permissible deductions like mortgage interest or depreciation from one's taxable income.