A Firm Has an Operating Profit of $300,000, Interest of $35,000

question 79

Multiple Choice

A firm has an operating profit of $300,000, interest of $35,000, and a tax rate of 40 percent. The firm has an after-tax cost of debt of 5 percent and a cost of equity of 15 percent. The firm's target capital structure is set at a mix of 40 percent debt and 60 percent equity. Assuming this as the optimum capital structure, the value of the firm is ________.

• A) $1.4 million
• B) $2.2 million
• C) $1.8 million
• D) $6.0 million

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Definitions:

Aa Lava

A type of lava flow characterized by a rough, jagged surface formed from the cooling and solidification of basaltic lava.

Vesicles

Small cavities in volcanic rocks that are formed by gas bubbles trapped during the solidification of the rock.

Shield Volcanoes

Large, broad volcanoes with gentle slopes, built by the eruption of low-viscosity lava that can flow long distances.

Fluid Lava

Magma that has reached the surface through a volcanic eruption and flows easily due to its low viscosity.