Which of the following is true of levered firms if they pay a corporate tax and no personal tax?
A) The value of a levered firm with static risk-free perpetual debt is the value of an otherwise equivalent unlevered firm divided by the product of the corporate tax rate and the market value of the firm?s debt.
B) The value of a levered firm with static risk-free perpetual debt is the value of an otherwise equivalent unlevered firm plus the product of the corporate tax rate and the market value of the firm?s debt.
C) The value of a levered firm with static risk-free perpetual debt is the value of an otherwise equivalent unlevered firm minus the product of the corporate tax rate and the market value of the firm?s debt.
D) The value of a levered firm with static risk-free perpetual debt is the value of an otherwise equivalent unlevered firm plus the product of (1- corporate tax rate) and the market value of the firm?s debt.
Correct Answer:
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