Answer :
Option II) VL = EL + DL accurately represents the relationship between the value of a levered firm, its equity value, and its debt value.
What are Unlevered and Levered Firms?
Among the given options, only option II) VL = EL + DL is true. In this context, VU represents the value of the unlevered firm U, VL represents the value of the levered firm L, EU represents the equity value of the unlevered firm, EL represents the equity value of the levered firm, and DL represents the debt value of the levered firm.
The value of the unlevered firm (VU) only includes equity, while the value of the levered firm (VL) includes both equity (EL) and debt (DL).
Therefore, option II) accurately reflects the relationship between VL, EL, and DL.
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