Suppose That BBB Pays Corporate Taxes of 35% and That

question 79

Multiple Choice

Suppose that BBB pays corporate taxes of 35% and that shareholders expects the change in debt to be permanent.Assume that capital markets are perfect except for the existence of corporate taxes and financial distress costs.If the price of BBB's stock rises to $10.85 per share following the announcement,then the present value of BBB's financial distress costs is closest to:

• A)$21.25 million
• B)$35.00 million
• C)$11.40 million
• D)$13.75 million

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Definitions:

United States

A country in North America consisting of 50 states and a federal district, known for its significant influence on world economy, politics, and culture.

Depressions

Extended periods of significant decline in general economic activity, usually marked by severe drops in GDP, high unemployment, and deflation.

March 1933

A significant month during the Great Depression in the United States, marked by President Roosevelt's Bank Holiday and the beginning of New Deal policies.

Banks

Financial institutions that accept deposits from the public, lend money, and offer various other financial services.