Suppose That Your Firm's Current Unlevered Value Is $800,000,and Its

question 22

Multiple Choice

Suppose that your firm's current unlevered value is $800,000,and its marginal corporate tax rate is 35%.Also,you model the firm's PV of financial distress as a function of its debt ratio (D/V) according to the relation: PV of financial distress = 800,000 × (D/V) ².What is the firm's levered value if it issues $200,000 of perpetual debt to buy back stock?

• A)$820,000.
• B)$869,555.
• C)$920,000.
• D)$350,000.

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Definitions:

Social Security Tax

Taxes collected to fund the Social Security program, providing benefits for retirees, the disabled, and survivors of deceased workers.

Medicare Tax

A federal tax that funds Medicare, a healthcare program for individuals over 65 and some younger people with disabilities; deducted from employee wages with a matching amount paid by employers.

Time And A Half

The payment rate typically used for overtime work, equal to one and a half times the regular hourly wage.

Notes Payable

Short-term or long-term liabilities recorded when a business borrows money or purchases goods or services on credit with a formal written promise to pay.