When a corporation issues permanent debt, the value of all its securities:
A) increases by the present value of the tax shield.
B) decreases by the present value of the tax shield.
C) increases by the annual interest tax shield.
D)decreases by the annual interest tax shield.

Question

Quizplus · Accepted Answer

The value of a corporation's securities increases by the present value of the tax shield when it issues permanent debt. This is because the interest payments on the debt are tax-deductible, reducing the corporation's taxable income and thus its taxes, which increases the overall value of the firm.

When a Corporation Issues Permanent Debt, the Value of All