CA Inter P6 · Chapter 5 · Question 3 of 9
According to Modigliani and Miller (with corporate taxes), an unlevered firm is valued at ₹ 50 crore. An otherwise identical firm has ₹ 20 crore of permanent debt, and the corporate tax rate is 30%. The value of the levered firm is:
Test yourself: pick an answer
Reveal answer & explanation
Correct answer: B) ₹ 56 crore
Explanation
With corporate taxes, MM state that VL = VU + tD, where tD is the present value of the interest tax shield on permanent debt. VL = 50 + 0.30 x 20 = 50 + 6 = ₹ 56 crore. ₹ 50 crore would be the result under MM without taxes. ₹ 70 crore wrongly adds the full debt.
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