Question

[Q29-33] Assume the M&M with corporate taxes. The corporate tax rate is 40%. Your firm is...

  1. [Q29-33] Assume the M&M with corporate taxes. The corporate tax rate is 40%. Your firm is currently unlevered with 100% equity. As of now, the value of the firm’s equity is $400K, and the firm’s cost of capital is 10%. Assume that your firm can borrow at 4% from a bank.


    Suppose that you decided to lever up by reducing equity and increasing debt. As the result, your firm now has $250K in debt. Your firm plans to maintain this debt amount forever. What is the present value of the interest tax shield?

    A.

    $40K

    B.

    $160K

    C.

    $80K

    D.

    $100K

Question 29

  1. What is the value of the firm under the new capital structure? (Hint: Use the first M&M proposition with corporate taxes.)

    A.

    $100K

    B.

    $400K

    C.

    $500K

    D.

    $250K

Question 30

  1. What is the market value of equity under the new capital structure? (Hint: Use the balance sheet identity.)

    A.

    $500K

    B.

    $100K

    C.

    $400K

    D.

    $250K

Homework Answers

Answer #1

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THERE ARE 3 QUESTIONS: ANSWERS ARE : D :100 , C: 500, D : 250

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