Olbet, Inc., is a nongrowth company in the 35-percent tax bracket. Olbet’s perpetual EBIT is \($1.2\) million per annum. The firm’s pretax cost of debt is 8 percent and its interest expense per year is \($200,000.\) Company analysts estimate that the unlevered cost of Olbet’s equity is 12 percent.

a. What is the value of this firm?

b. What does the calculation in

(a) imply about the correct level of debt?

c. Is the conclusion correct? Why or why not?