Consider the Modigliani and Miller world of corporate taxes. An unlevered (all-equity) firm value is $200 million. By adding debt, the annual interest expense is $40 million, the corporate tax rate is 25%, and the discount rate on the tax shield is 6%

What is the value of the firm after adding debt?
A) $366.67 million
B) $425 million
C) $433.33 million
D) $450 million

Answer: A
Explanation: A) We first compute the tax shield:
= ($40,000,000 ∗ .25)/.06 = $166.67million.
We can now compute firm value:
VL = VE + Tax Shield = $200 million + $166.67 million = $366.67 million.