Question

Multiple Choice There is no condition known to date whereby a corporation can increase firm value through the use of leverage. o Corporations generally pay a lower cost on debt than do individuals due to their vast pool of liquid assets. o O If individual's pay a higher cost to borrow than corporations do, then corporations can increase firm value by borrowing. o Margin accounts tend to be high interest rate sources of funds for individuals. o o Corporations can increase firm value by borrowing provided their interest rate on debt exceeds that paid by individuals.

Answer 1

1.
If individual's pay a higher cost to borrow than corporations do, then corporations can increase firm value by borrowing.

2.
unlevered cost of capital=(cost of equity+pretax cost of debt*D/E*(1-t))/(1+D/E*(1-t))=(13.2%+7.5%*0.6*(1-35%))/(1+0.6*(1-35%))=11.600719%

3.
=Debt*tax rate
=13000*35%
=4550.0000