Backcountry Adventures is aColorado-based outdoor travel agent that operates a series of backcountry huts.Currently, the value of the firm is $3.8 million. But profits will depend on the amount ofsnowfall: If it is a goodyear, the firm will be worth $5 million, and if it is a bad year it will be worth $2.1 million. Suppose managers always keep the debt to equity ratio of the firm at 30%, and the debt is riskless.

a. What is the initial amount ofdebt?

b. Calculate the percentage change in the value of thefirm, its equity and its debt once the level of snowfall isrevealed, but before the firm adjusts the debt level to achieve its target debt to equity ratio.

c. Calculate the percentage change in the value of outstanding debt once the firm adjusts to its targetdebt-equity ratio.

d. What does this imply about the riskiness of thefirm's tax shields. Explain