Based on this information, which of the following is true? a. The value of Firm L is the same as the value of Firm U. b. The tax paid by Firm L is $2,500,000. c. The value of Firm L exceeds the value of Firm U by $1,500. d. Firm U pays lesser tax than Firm L. e. The cash flow from L is $7,501,500
Based on this information, which of the following is true? a. The value of Firm L is the same as the value of Firm U. b. The tax paid by Firm L is $2,500,000. c. The value of Firm L exceeds the value of Firm U by $1,500. d. Firm U pays lesser tax than Firm L. e. The cash flow from L is $7,501,500
Chapter13: Capital Structure Concepts
Section: Chapter Questions
Problem 4P
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Choose a,b,c,d,e for the following:
Question 3 -
Firm U has an EBIT of $10 million and is 100% equity-financed while Firm L, which also has an EBIT of $10 million, uses $100,000 as debt in its capital structure. The interest rate is 6% p.a. and both firms are subject to a 25% tax rate. Based on this information, which of the following is true?
a. The value of Firm L is the same as the value of Firm U.
b. The tax paid by Firm L is $2,500,000.
c. The value of Firm L exceeds the value of Firm U by $1,500.
d. Firm U pays lesser tax than Firm L.
e. The
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