Question

Assume an unlevered firm changes its capital structure to include $100,000 in permanent debt at a 7% interest rate. The tax rate is 35%. According to MM I with taxes, the value of the firm will increase by ______ due to this change in its capital structure.

Answer 1

Answer:

Increase in value of firm due to debt = $350,000

Explanation:

given data

Value of debt = $1,000,000

interest rate = 7%

tax rate = 35%

solution

we get here Increase in value of firm due to debt that is express as

Increase in value of firm due to debt = Value of debt × tax rate    ......................1

put here value and we get

Increase in value of firm due to debt = $1,000,000  × 35%

Increase in value of firm due to debt = $1,000,000  × 0.35

Increase in value of firm due to debt = $350,000