A company is currently has EBIT=$300000 of cash flow a year, all equity financed, Tc=40%, rate of ROE is 20%.

Question:

a. calculate the value of the firm when it is all equity financed.

b. if management would like to substitute debt for common stock. what is the total firm value if issues $600000 of perpetual bonds, interest rate=10%, use proceeds to buy back stock?

c. if the company issue the debt and has 25% to bankrupt after 3yrs. the bankruptcy cost $300000, discount rate=8%. what will be the firm value given the expected bankruptcy costs?