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The current value of a firm is 838,300 dollars and it is 100% equity financed. The...

The current value of a firm is 838,300 dollars and it is 100% equity financed. The firm is considering restructuring so that it is 80% debt financed. If the firm's corporate tax rate is 0.8, the typical personal tax rate of an investor in the firm's stock is 0.2, and the typical tax rate for an investor in the firm's debt is 0.2 what will be the new value of the firm under the MM theory with corporate taxes but no possibility of bankruptcy.

670,640

1,374,812

167,660

1,676,600

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Answer #1

Value of a levered firm = {V}+{V}*{P}*(1 - ( 1-{Tc})*(1-{Ts})/(1-{Td}) )/100

=  838,300+(838,300 * 80%)*(1 - ( 1-0.8)*{(1-0.8})/(1-0.2)}/100

= 1,374,812

Option 1,374,812

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