3. Economy Manufacturing has EBIT of S80 million. There is $100 million of debt outstanding with a required return of 8%. The required rate of return on equity is 15% and the corporate tax rate is 25% (a) Calculate earnings after interest and taxation assuming Economy Manufacturing has either no debt in its capital structure (all-equity firm) or has S100 million of debt in its capital structure. (b) Determine the present value of the interest tax shield as well as the total value of Economy Manufacturing assuming it has $100 million of debt in its capital structure (c) Determine the gain to leverage and the value of Economy Manufacturing assuming corporation taxes and a personal tax rate on equity income of 15% and 30% on debt income, assuming it has $100 million of debt in its capital structure (d) Economy Manufacturing is considering adding additional debt to its capital structure. Based on the data in Table 2, you are asked to advise the firm on the 'optimal' amount of additional debt it should adopt in its capital structure Table 2 120 110 140 150 Debt (S Millions) PV (Gain to Leverage 130 14 PV (Financial Distress Costs