Which of the following statements concerning the MM extension with growth is NOT

Question

Which of the following statements concerning the MM extension with growth is NOT CORRECT?

(a) The tax shields should be discounted at the unlevered cost of equity.
(b) The value of a growing tax shield is greater than the value of a constant tax shield.
(c) For a given D/S, the levered cost of equity is greater than the levered cost of equity under MM's original (with tax) assumptions.
(d) For a given D/S, the WACC is less than the WACC under MM's original (with tax) assumptions.
(e) The total value of the firm increases with the amount of debt. (Points: 20)

Explanation / Answer

(a) The tax shields should be discounted at the unlevered cost of equity.

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