Assume the Following Selected Financial Information About a Firm That

question 99

Multiple Choice

Assume the following selected financial information about a firm that is about to restructure capital by exchanging equity for debt: $\begin{array}{ll}\text { Present debt level }&=\$0\\\text { Proposed equity for debt swap }&=\$1,500,000\\\text { Interest rate on debt }&=6\%\\\text { Corporate tax rate }&=40\%\\\text { Market value of the firm's ecuity }&=\$2,400,000\end{array}$
Which of following would be true as a result of the restructuring according to the Modigliani-Miller model with taxes but without bankruptcy costs?

• A) The new debt would contribute $600,000 to the value of equity due to its tax effect.
• B) The market value of the remaining equity would be $1,500,000.
• C) The total value of the firm would increase to $3,000,000.
• D) All of the above.

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