1. As a financial analyst, you are given the following information on a firm: the firm has a Debt-Equity ratio of 0.35. R0 for this firm equals to 13.1%. The pre-tax cost of firms debt is 6.4%. Earnings before tax (and interest) is $7,720,000 per year and remains stable indefinitely. This firm faces a tax rate of 21% and distributes all earnings as dividends at the end of each year.

Use the flow to equity method to calculate the value of the companys equity. Just a reminder that if the firm is levered, then the shareholders need to pay interest first before paying taxes. [hint: the interest payments from equity holders to debt holders can be calculated based on the market value of debt calculated in the previous question.]