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Verdich [7]
3 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]3 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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Answer:

14.06%

Explanation:

Assume their is a cash out flow today of $100000, and next four year annual cash inflow of 10000 and 120000 at the end of year 4.

We can use IRR formula to find the interest rate.

year                            cashflow

0                                   -100000

1                                      10000

2                                     10000

3                                     10000

4                                     130000

IRR                                 14.06%

The calculation has been done on excel sheet

8 0
3 years ago
Suppose that we have the following information concerning the government's finances and the macroeconomy for a given year: Gover
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Incorrect Statement about the Statement of Cash Flows:

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