[Q2933] 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
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
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 
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THERE ARE 3 QUESTIONS: ANSWERS ARE : D :100 , C: 500, D : 250
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