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Consider an infinitely lived pure-equity firm (no debt). Every year the firm has revenue of 7,000 and a total cost of 6,000 (variable plus fixed
Consider an infinitely lived pure-equity firm (no debt). Every year the firm has revenue of 7,000 and a total cost of 6,000 (variable plus fixed costs). It faces a corporate tax rate of 40% and invests every year 300 into a new project. The investment is written off linearly over 10 years (yearly depreciation is 30). The market interest rate is 10%. (a) What is the value of the firm (NPV) on the market?
b) Now suppose the corporate tax rate were cut to 30%. All other things equal, what would now be the new value of the firm?
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