Company C is financed by equity for a market value of 40 and by debt for a market value of 30. This debt is perpetual and its interest rate is 6%. The corporate income tax rate is 40%

(a) How much of C’s enterprise value is due to debt? The shareholders’ required rate of return is 11%.

(b) By how much will the enterprise value increase if the company borrows 5 on the same terms as previously (assume a required rate of return of 11% to simplify calculations)?

(c) By how much will the enterprise value fall if there is a change in the tax laws and in four years’ time, financial expenses will no longer be tax deductible.