Company FANTOTO has a perpetual EBIT of 1000$ every year with no risk. The discount rate is 8% and the corporate tax rate is 30%.

a) Suppose FANTOTO is paying all its net income in dividends every year. What is the value of equity if the firm is unlevered? What is the value of the firm?

b) Suppose now that FANTOTO is partly financed with debt and has to pay a perpetual amount of 500$ every year in interests. Compute the value of equity, debt and tax shield.

c) Compute the value of the levered firm. Has the value of the firm increased or decreased with respect to point a)? Explain

d) Assume now that all FANTOTO debt is held by company Zoi which faces the same corporate tax as FANTOTO (30%). On the other hand, FANTOTO's shareholders face an average individual tax rate of 25% on the dividend they receive. Assume no capital gains, so that the only reward to FANTOTO's shareholders is the annual dividend. Does debt have an advantage over equity? State and explain the condition under which debt has a tax advantage over equity and do the calculations for this particular example.