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:

Authenticity

Authenticity is the degree to which an individual, object, or presentation is true to its own character, spirit, or origin, often seen as sincerity and genuineness.

Psychological Empowerment

A state in which individuals feel a sense of control over their work and perceive their actions as meaningful, competent, and self-determined.

Self-Determination

The process by which a person controls their own life, making choices and decisions based on personal preferences and interests without undue influence from others.

Responsibility

The obligation to carry out duties and make decisions within a role, organization, or towards society.