Assume the following selected financial information about a firm that is about to restructure capital by exchanging equity for debt: $\begin{array}{ll}
\text {Present debt level }&=\$ 0\
\text {Proposed equity for debt exchange }&=\$ 1,000,000\
\text { Present EBIT}&=\$ 500,000\
\text { Interest rate on debt}&=6 \% \
\text { Corporate tax rate}&=40 \%\
\text {Current market value of equity }&=\$ 3,000,000 \
\end{array}$
What is the market value of the firm's equity after the restructuring according to the Modigliani-Miller model with taxes but without bankruptcy costs?
A) $2,000,000
B) $2,264,000
C) $2,400,000
D) None of the above

Question

Assume the following selected financial information about a firm that is about to restructure capital by exchanging equity for debt: $\begin{array}{ll}
\text {Present debt level }&=\$ 0\
\text {Proposed equity for debt exchange }&=\$ 1,000,000\
\text { Present EBIT}&=\$ 500,000\
\text { Interest rate on debt}&=6 \% \
\text { Corporate tax rate}&=40 \%\
\text {Current market value of equity }&=\$ 3,000,000 \
\end{array}$
 What is the market value of the firm's equity after the restructuring according to the Modigliani-Miller model with taxes but without bankruptcy costs?
A) $2,000,000
B) $2,264,000
C) $2,400,000
D) None of the above

Quizplus · Accepted Answer

The Answer of Assume the following selected financial information about a firm that is about to restructure capital by exchanging equity for debt: $\begin{array}{ll}
\text {Present debt level }&=\$ 0\
\text {Proposed equity for debt exchange }&=\$ 1,000,000\
\text { Present EBIT}&=\$ 500,000\
\text { Interest rate on debt}&=6 \% \
\text { Corporate tax rate}&=40 \%\
\text {Current market value of equity }&=\$ 3,000,000 \
\end{array}$
 What is the market value of the firm's equity after the restructuring according to the Modigliani-Miller model with taxes but without bankruptcy costs?
A) $2,000,000
B) $2,264,000
C) $2,400,000
D) None of the above

Assume the Following Selected Financial Information About a Firm That