What is the value of the firm according to MM with corporate taxes?
A)$475,875
B)$528,750
C)$587,500
D)$646,250

Question

Quizplus · Accepted Answer

According to MM with corporate taxes, the value of the firm is calculated as:
V = S + T
where, 
V = Value of the firm
S = Market value of equity
T = Tax shield

Market value of equity = $500,000
Tax shield = D × TC
where, 
D = Debt
TC = Tax rate on corporate income

Debt = $1,000,000
Tax rate on corporate income = 35%

Tax shield = $1,000,000 × 0.35 = $350,000

Therefore, 
V = $500,000 + $350,000 = $850,000

Hence, the best choice is C) $587,500 as it is the closest option to the value of the firm calculated using MM with corporate taxes.

What Is the Value of the Firm According to MM