The market value of a levered firm can be represented by the following equation: Market value of levered firm = Market value of unlevered firm ____ Present value of tax shield ____ Present value of financial distress costs ____ Present value of agency costs
A) minus; plus; plus
B) plus; plus; plus
C) plus; minus; minus
D) minus, plus, minus

Question

Quizplus · Accepted Answer

According to the equation, the market value of a levered firm is equal to the market value of an unlevered firm plus the present value of tax shield, minus the present value of financial distress costs, and minus the present value of agency costs. Therefore, the correct choice is C, as the market value of a levered firm is positively related to the present value of tax shield and negatively related to the present value of financial distress costs and agency costs.

The Market Value of a Levered Firm Can Be Represented