NORSK, Inc., is valued at \(V=100\). Tomorrows value, \(V^{\prime}\), will be either 150 ("up" state) or 50 ("down" state), with equal chance. NORSK is presently an all-equity firm, but they are considering issuing a corporate bond with face value \(\$ 100\) and coupon \(\$ 10\), because they were told that they can reduce their taxable earnings with the amount of the coupon. The corporate tax rate is \(50 \%\). According to their accountants, NORSK will have \(\$ 10\) in taxable earnings in the "up" state, and \(\$ 5\) in the "down" state. The risk free rate is \(10 \%\).

1. How does the value of the firm change upon the bond issue?

2. Value the bond. Use this to re-value the firm, now using the APV formula, unlike in your previous answer.

3. Why is there a discrepancy between the values of the (levered) firm you obtained in the previous two answers?