A Firm Is Currently Financed with 40% Equity and 60

question 15

Multiple Choice

A firm is currently financed with 40% equity and 60% debt.The firm generates perpetual earnings after taxes and interest payments of $2 million per year.The firm's cost of equity is 12%,its cost of debt is 5%,and it has a tax rate of 40%.What is the value of the levered firm?

• A)$2 million
• B)$30.3 million
• C)$25.6 million
• D)$46.7 million
• E)$10 million

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Definitions:

Contingent Liabilities

Potential obligations that may arise in the future due to past events, the occurrence and amount of which are uncertain.

Probable

A term used to describe something that is likely to occur or is likely true.