1. Zenith Corp. is an all-equity firm and has a perpetual EBIT of $250,000. The cost of unlevered equity is 12% and the corporate tax rate is 40%. Zenith is considering issuing debt worth $175,000 to buy back equity. The personal tax rate on interest income is 50% and on dividends is 30%. What is the increase in firm value after issuing new debt?

A. $26,000 B. $28,000 C. $30,000 D. $32,000 E. $34,000

2. In the above problem, if the personal tax rates on interest and dividends are equal, what would be the increase in firm value after issuing new debt? (We see that when the personal income tax rate on interest income is greater than that on dividends, it reduces some of the gains of leverage).

A. $50,000 B. $55,000 C. $60,000 D. $65,000 E. $70,000

(please show details of your work for both questions)