Alpha Techs CFO is comparing his company against Beta Corp. Hes curious as to why Beta decided to have debt in its capital structure and is wondering if Alpha should do the same. Assume that now the government is imposing a 20% corporate tax rate. Beta has perpetual debt. Use facts from the previous problems when needed, but do not forget that now were dealing with taxes, whereas in previous calculations we were in a world of no taxes (this will change your previous answers).

You have $60,000 and are looking to invest. Both Alpha and Beta have caught your eye. Both firms have EBIT of $100,000 in perpetuity. Theres a 0% corporate tax rate. Alpha Tech and Beta Corp are identical companies except for their capital structures. Alpha has no debt on its balance sheet and 10,000 shares outstanding, each worth $100. Beta managed to raise $400,000 in debt at a cost of 8% (perpetual debt). Theres a 0% corporate tax rate.

1. Calculate the value of Alpha Tech (i.e. calculate the value of the unlevered firm)

2.Calculate the value of Beta Corp (i.e. calculate the value of the levered firm)(perpetual debt)

3. If Alpha were to mimic Betas capital structure and borrow the same amount of money, what would be the increase in value of Alpha after taking out the loan? (hint: look at the results from the previous questions)