Q 14.33. Consider a growing firm that is expected to produce earnings of $10 million next year. The firm's earnings growth rates are 15% per annum. The firm's cost of capital is 20%. Its tax rate is 0. 1. What is the market value of this firm? 2. What is the firm's P/E ratio if it has no debt? 3. Now assume that the cost of capital for debt of $100 million is 8%, while the cost of cap- ital for the remaining levered equity is 32%. (Again, the weighted average cost of capital is 50% 8% +50% 32% 20%, so the firm's cost of capital has not changed.) Interest on the $100 million debt is paid out. What is the equity's P/E ratio now? 4. Has the increase in debt increased or decreased the firm's P/E ratio?