#$4.$ Suppose firm $AB$ is considering spinning off division $B.$ There are no positive or negative

synergies between division A and division B$.$ Division B is in need of raising $$20$ million via

bond sale. If this $$20$ million is raised and invested in division B the cash flows of the divisions

are as follows: $[$For simplicity assume all cash flows are present values so there is no need to

discount the cash flows and the lender just needs to break even on average to extend a loan.$]$

$($a$)$ If firm $AB$ does not conduct a spinoff, $($i$)$ what will be the interest rate on the bonds that are

issued by the firm $($assume both divisions cash flows are available to repay the loans$)?,$ and $($ii$)$

what will be the total equity value of firm $AB$ after the issue?

$($b$)$ If firm $AB$ does conduct the spinoff, $($i$)$ what will be the interest rate on the bonds that are

issued by the independent firm B after the spinoff and $($ii$)$ what will be the total equity value of

firm A plus firm B after the independent firm B issues the bonds?