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

question 70

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. According to the traditional approach to capital structure, the value of the firm is

• A) $1.4 million.
• B) $2.0 million.
• C) $2.7 million.
• D) $6.0 million.

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Definitions:

Credit Card Company

A financial institution that issues credit cards, allowing cardholders to purchase goods and services on credit.

Installment Plan

A method of payment of a purchase or services over a period of time.

Finance Charge

A fee representing the cost of credit or the cost of borrowing, including interest and other associated expenses.

Down Payment

An upfront payment made when purchasing an item or property, typically a percentage of the total purchase price, signifying the buyer's commitment.