General Studies · Capital Structure Theories
Given below are two statements: one is labelled as Assertion A and the other is labelled as Reason R. Assertion A: In a world where corporate taxes exist, the total market value of a leveraged firm exceeds the total market value of an identical unleveraged firm. Reason R: The present value of the permanent interest tax shield, calculated as the corporate tax rate multiplied by the market value of debt, adds directly to the firm's value. In the light of the above statements, choose the most appropriate answer from the options given below:
Verified Solution4 OptionsUpdated: October 2026👁️1 View
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- 1Both A and R are correct and R is the correct explanation of A✓
- 2Both A and R are correct but R is NOT the correct explanation of A
- 3A is correct but R is not correct
- 4A is not correct but R is correct
Correct answer
Both A and R are correct and R is the correct explanation of A
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