Consider a firm whose capital structure includes both debt and equity.If the firm must pay taxes in a given year,which of the following has the highest value?
A)The value of the unlevered firm.
B)The value of the levered firm.
C)The value of the firm's debt.
D)The value of the firm's equity.
E)The value of the interest tax shield.

Question

Quizplus · Accepted Answer

The value of a levered firm is higher than that of an unlevered firm in a tax-paying scenario due to the tax deductibility of interest payments. This creates an interest tax shield, which increases the overall value of the firm.

Consider a Firm Whose Capital Structure Includes Both Debt and Equity.If