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When corporate taxes and the cost of financial distress are taken into consideration, the market value...

When corporate taxes and the cost of financial distress are taken into consideration, the market value of a firm is equal to the value of the all-equity firm ________ the PV of the tax shield ________ the costs of financial distress.

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Answer #1

When corporate taxes and cost of financial distress are taken into consideration, the market value of a firm is equal to the value of all equity firm Plus the PV of the tax shield minus the cost of financial distress.

Market Value of Firm = Value of all equity firm + PV of tax shield - Cost of financial distress

Tax shield will increase value of firm since it has the tax deduction

Financial distress will have direct and indirect costs which will have impact on firm's value

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