Consider a rm that produces 10 units of gold a year from today. The price of gold next year, S T , is normally distributed

Consider a firm that produces 10 units of gold a year from today. The price of gold next year, S_T, is normally distributed with mean 100 and volatility of 20%. The firm knows that there will be a buyer who is willing to pay the price of 90 per unit, no matter what the value of S_T is. At T = 1, the firm can choose whether to sell to this buyer or at the market price of S_T.

Firm cash flows are taxed at a flat rate of t = 30%. The risk-free rate is R_F = 5% and is compounded annually. Use two decimal places for your answers.

1) What is the present value of the cash flows of the hedged unlevered firm after taxes?

2) If the hedged firm above issues the maximum amount of safe debt D to take advantage of the fact that the interest payments are tax deductible, what is the total present value of the hedged levered firm’s after-tax cash flows? How does it compare with your answer above, and why?