Vu

问题如下：

An analyst gathers the following information about a company:

Based on Modigliani and Miller's Proposition I with taxes, if the company issues common stock to repay outstanding debt, the value of the unlevered company will be *closest* to:

选项：

A.$0.9 billion. B.$1.3 billion. C.$1.5 billion.

解释：

Correct Answer: B

B is correct because the value of the levered company is greater than that of the all-equity company by an amount equal to the tax rate multiplied by the value of the debt, also termed the debt tax shield. VL = VU + tD, where VL = the value of the levered company, VU = the value of the unlevered company, t is the marginal tax rate and tD is the debt tax shield. Therefore, $1.5 billion = VU + 0.30 × $0.6 billion and VU = $1.32 billion ≈ $1.3 billion.

A is incorrect because the marginal tax rate is omitted when calculating the debt tax shield. VL ≠ VU + D, and therefore, VU ≠ $1.5 billion – $0.6 billion = $0.9 billion.

C is incorrect because candidates use Modigliani and Miller's Proposition I without taxes which states that the market value of a company is not affected by the capital structure of the company. Therefore, VL = VU and the value of the unlevered company is $1.5 billion.