Consider the Modigliani and Miller world of corporate taxes. An unleveraged (all-equity) firm value is $100 million
By adding debt, the annual interest expense is $10 million, the corporate tax rate is 40%, and the discount rate on the tax shield is 10%. What is the value of the firm after adding debt?
A) $100 million
B) $120 million
C) $140 million
D) $160 million
Answer: C
Explanation: C) We first compute the tax shield:
= = $40 million.
We can now compute firm value:
VL = VE + Tax Shield = $100 million + $40 million = $140 million.
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