Question #78
Reading: Reading 21 Free Cash Flow Valuation
PDF File: Reading 21 Free Cash Flow Valuation.pdf
Page: 37
Status: Unattempted
Correct Answer: B
Question
Currently, a firm has no outstanding debt. If the firm would add a small amount of leverage to its balance sheet, what should be the impact on the firm's value? There would be:
Answer Choices:
A. no change in firm value
B. an increase in value due to interest tax shields
Explanation
The amount of financial leverage used by a firm will affect its value. For small amounts of
leverage, the additional bankruptcy risk will be low, and will be more than offset by the
additional value of interest tax shields.