The change in firm value in the presence of corporate taxes only is:
A)positive as equity holders face a lower effective tax rate.
B)negative as equity holders 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 the above.

Question

Quizplus · Accepted Answer

The change in firm value in the presence of corporate taxes is positive because debt interest payments are tax-deductible, resulting in a tax shield for equity holders. Therefore, the firm's value increases, resulting in a positive impact.

The Change in Firm Value in the Presence of Corporate