1. a)A firm generates a free cash flow of 1 next year. Starting at the beginning of next year, the free cash flow is expected to grow at a rate of 0.05 a year. The rate of return the unlevered asset should earn is 0.1. The risk-free rate is 0.05 and the corporate tax rate is 0.3. The firm decides to issue debt today and wont change its capital structure in the future. The firms debt is worth 5. The firm forever only pays interest on this debt. What is the value of the levered firm?

b)Take the setup of the previous question. The manager changed his mind about the debt issuance and instead of issuing debt only once, he decides to keep a constant leverage ratio of 0.4 forever. The firms debt is risk-free. What is the value of the levered firm?