Assume That Capital Markets Are Perfect Except for the Existence

question 66

Multiple Choice

Assume that capital markets are perfect except for the existence of corporate taxes.Your firm pays 40% of earnings in taxes and you decide to issue $25 million in new debt and $25 million in new equity.Your ownership stake in the firm following these new issues of debt and equity is closest to:

• A)58%
• B)55%
• C)33%
• D)50%

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Definitions:

Marginal Revenue Product

The additional revenue generated from using one more unit of input.

Marginal Product

The extra output generated from increasing a particular input by one unit while keeping all other inputs unchanged.

Output

The total amount of goods or services produced by a firm or economy over a specific period of time.

Derived Demand

The demand for a factor of production or intermediate good resulting from the demand for another good or service, such as the demand for steel being driven by the demand for automobiles.