4 Assume that the corporate tax rate is 35 per cent, capital gains tax is zero and the personal income tax rate is 45 per cent. What is the value of Sapphire before the restructuring? What is its value after? (20 marks)

Sapphire is an all-equity financed company, which is valued at €250 million. The firm’s shares are expected to produce a return of 15 per cent. The company has decided to modify its capital structure to capture the tax benefits of debt. The plan is to have a target debt/equity ratio of 25 per cent. The company has been told that any borrowings it makes will attract a rate of 7 per cent.