If firm U is unlevered and firm L is levered, then which of the following is true?
I.V_U = E_U.
II.V_L = E_L + D_L.
III.V_L = E_U + D_L.

Question

If firm U is unlevered and firm L is levered, then which of the following is true? I.V_U = E_U. II.V_L = E_L + D_L. III.V_L = E_U + D_L. A)I only B)I and II only C)I, II, and III D)III only

Quizplus · Accepted Answer

- I is true for both unlevered and levered firms as it represents the value of equity with no debt.
- II is only true for levered firms as it takes into account the value of debt and the associated tax shield.
- III is not true as it tries to equate the value of levered and unlevered firms, which cannot be done without making further assumptions.

If Firm U Is Unlevered and Firm L Is Levered