The change in firm value in the presence of corporate taxes only is:
A)positive as equityholders face a lower effective tax rate.
B)positive as equityholders gain the tax shield on the debt interest.
C)negative because of the increased risk of default and fewer shares outstanding.
D)negative because of a reduction of equity outstanding.
E)None of the above.

Question

Quizplus · Accepted Answer

In the presence of corporate taxes, the tax shield on debt interest provides a benefit to equityholders, which results in an increase in firm value.

The Change in Firm Value in the Presence of Corporate