When financial distress is a possibility,the value of a levered firm consists of:
I.value of the firm if all-equity-financed;
II.present value of tax shield;
III.present value of costs of financial distress;
IV.present value of omitted dividend payments
A)I only
B)I + II
C)I + II - III
D)I + II - III - IV

Question

Quizplus · Accepted Answer

When financial distress is a possibility, the value of a levered firm consists of the value of the firm if all-equity-financed (I), the present value of tax shield (II), and the present value of costs of financial distress (III). The omitted dividend payments (IV) are not part of the firm's value in this case, as they are not directly related to financial distress. Therefore, the best choice is C (I+II-III).

When Financial Distress Is a Possibility,the Value of a Levered