Arbitra Inc.s current capital structure is 50% debt and 50% equity. Equity Beta is 1.1. The riskfree rate is 2%, and the expected return on the market is 10%.The expected return on debt is 6.8% and the expected return on equity is 12.04%. The government of Bigland, where Arbitra Inc. is located, introduces a 40% corporate income tax rate. Arbitra Inc. has only one project which is expected to generate $1000 of EBIT next year, at which point the firm will shut down.

c) Calculate Arbitra Inc.s firm value using the WACC method. Given the firm value you calculated, calculate the value of the firms debt.

d) Calculate Arbitra Inc.s firm value using the APV method and show that this gives the same answer as in (iii). Hint: To show this, you need to first explicitly calculate the interest tax shield; for the calculation of the present value of the tax shield, use the expected return on the firms assets.