An Unlevered Firm Currently Has a Value of $15 Million

question 31

Multiple Choice

An unlevered firm currently has a value of $15 million.The firm has a tax rate of 40%.The firm wishes to replace $5 million of its equity with $5 million of permanent debt.By increasing its leverage,the PV of the expected costs of financial distress would rise from 0 to $1 million.What is the value of the levered firm if it goes ahead with this plan?

• A)$10 million
• B)$14 million
• C)$15 million
• D)$16 million
• E)$20 million

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Definitions:

Gratuitous Bailment

A bailment relationship where the bailee agrees to hold goods without receiving any form of payment, purely out of goodwill.

Bailee

A bailee is a person or party who has been entrusted with the temporary possession of goods or property belonging to another (the bailor) without transfer of ownership.

Transfer of Securities

The act of moving ownership of stocks, bonds, or other securities from one party to another.

Debtor

An individual or entity that owes money to another party.