The change in firm value in the presence of corporate taxes only is:
A) positive as equityholders face a lower effective tax rate.
B) positive as equityholders gain the tax shield on the debt interest.
C) negative because of the increased risk of default and fewer shares outstanding.
D) negative because of a reduction of equity outstanding.
E) None of these.

Question

Quizplus · Accepted Answer

Corporate taxes provide a tax shield on the debt interest, which benefits equityholders by increasing the firm's value.

The Change in Firm Value in the Presence of Corporate