a. Assume the market capitalization of a firm's stock is $6,500,000 and there is $10,000,000 of debt outstanding. How much additional debt can be issued if the $6,500,000 is accepted as being reasonable? There is a .35 corporate tax rate.

b. If a bid of $7,000,000 is made for the $6,500,000 of equity, how much can the buyers hope to make?

c. With a bid of $7,000,000 and a cash-out of $12,243,000 after four years, the equity investors earn what IRR?

d. Now assume $6,000,000 of .08 debt (zero coupon), zero taxes, and a cash-out of $12,243,000 minus debt payments at time 4.
What IRR does the $1,000,000 of equity earn?

e. Now assume a .35 tax rate. Compute the value at time 4 from reinvesting the tax savings to earn .08 before tax and .08(1-
.35) = .052 after tax.

f. What IRR is earned on the equity capital of $1,000,000? Assume the $12,243,000 from (2c.) is after tax except for the tax savings from the debt.