Assume the corporate tax rate is 50%. A firm has perpetual expected EBIT of $100. The firm has no debt in its capital structure. Its cost of equity is 10%. What would be the value of the firm if it issued $400 in perpetual debt?
A) $700.
B) $800.
C) $900.
D) $1,000.

Question

Quizplus · Accepted Answer

The correct answer is A. The value of the firm with debt is $700. This is because the debt will increase the firm's interest expense, which will reduce its earnings before interest and taxes (EBIT). The reduced EBIT will then lead to a lower value for the firm.

Assume the Corporate Tax Rate Is 50