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City Travel has an expected EBIT of $45,000 in perpetuity and a tax rate of 20 percent. The firm has $120,000 in outstanding debt at

City Travel has an expected EBIT of $45,000 in perpetuity and a tax rate of 20 percent. The firm has $120,000 in outstanding debt at an interest rate of 5 percent, and its unlevered cost of capital is 9 percent. What is the value of the firm according to M&M Proposition I with taxes? Should the company change its debt-equity ratio if the goal is to maximize the value of the firm? Explain.

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