Which of the following statements is correct for a firm that is 55% debt-financed and the value of equity equals $58 million?

Question

Quizplus · Accepted Answer

If the firm is 55% debt-financed, then the value of debt is 45% of the total value. So, we can calculate the total value of the firm as follows:

Total value = Equity value / (1 - % debt-financed) 
Total value = $58 million / (1 - 0.55) 
Total value = $129 million

Therefore, option B is correct. Option A is incorrect because it only takes into account the equity value. Option C and D are also incorrect because they assume that the total value is equal to the value of either debt or equity alone, which is not the case.

Which of the Following Statements Is Correct for a Firm