The market value of a leveraged firm is equal to the market value of an unlevera

Question

The market value of a leveraged firm is equal to the market value of an unleveraged firm
a.   minus the present value of tax shields minus the present value of financial      distress costs minus the present value of agency costs.

b.   plus the present value of tax shields minus the present value of financial        distress costs plus the present value of agency costs.

c.   plus the present value of tax shields plus the present value of financial dis      tress costs plus the present value of agency costs.

d.   plus the present value of tax shields minus the present value of financial dis      tress costs minus the present value of agency costs.

Explanation / Answer

The market value of a leveraged firm is equal to the market value of an unleveraged firm

Answer

d.   plus the present value of tax shields minus the present value of financial distress costs minus the present value of agency costs.

Note : Agency Cost Reduces the market Value of Levereged firm

Market value of a leveraged firm = market value of an unleveraged firm + PV of Tax Shield on Debt - Pv of Financial Distress cost - Pv of Agency Cost

Market value of a leveraged firm consist of financial distress than it should be reduced from market value of unlevered firm

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