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Verdich [7]
4 years ago
15

Which of the following expresses the value of a levered firm (VL) in the Static Tradeoff model of optimal capital structure [Not

e: VU denotes the value of the unlevered firm; CFD denotes expected costs of financial distress; and PV denotes present value.]
A. VL = PV(Tax Shield) - PV(CFD)

B. VL = VU + PV(Tax Shield) / PV(CFD)

C. VL = VU + PV(Tax Shield) - PV(CFD)

D. VL = VU + PV(Tax Shield)
Business
1 answer:
Brut [27]4 years ago
7 0

Answer:

C. VL = VU + PV(Tax Shield) - PV(CFD)

Explanation:

The static trade off theory is a theory of capital structure in corporate finance, first proposed by Alan Kraus and Robert H. Litzenberger. The theory emphasizes the trade-offs between the tax benefits of increasing leverage and the cost of bankruptcy associated with higher leverage. The <u>answer is C</u> as we know relative to the unleveraged firm, leverage provides both costs and benefits. The benefits are the tax shields provided by debt.

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