1. (25 pts. Please show how youve got the solutions, as well.)

You have two identical firms except that one is levered and the other unlevered.

And assume that EBIT: $20,000, interest: $2,000, : 10%, kb: 5%.

Without tax, the firm value of unlevered firm is ($ ) and that of levered firm ($ ).

With 20% of corporate tax, the firm value of unlevered firm is ($ )

and that of levered firm ($ ).

Suppose that you have $5,000. When there is no tax, if you use the money to buy

levered firms equity, your ROE should be ( )%.

2. (25 pts. Using the appropriate vocabulary in a correct manner is more important than

long explanation.)

Using the above problem, elaborate the investment strategy you need to employ

when you buy the unlevered firms equity in order to yield the same ROE

as your ROE in the above problem.

Also, discuss the implications this investment strategy has in finance.

3. (25 pts. Using the appropriate vocabulary in a correct manner is more important than

long explanation.)

Using the theories you learned in class, explain why firms want to use debts.

Also using the theories you learned in class, explain why debts hurt firms financially.

4. (25 pts. Using the appropriate vocabulary in a correct manner is more important than

long explanation.)

Using the theories you learned in class, explain why dividend policy doesnt matter.

Also using the theories, explain why firms do care about dividend policy