Firm F has the following features: EBIT is 120 at time 1 and 2000 at time 2. Debt has face value 1000, coupon rate 5%, and 2-year maturity. Coupon payments are made at time 1 and 2. The cost of debt is 5%. At both time 1 and 2, the net income is paid to shareholders as a dividend. The stock price drops at the time the dividend is paid (ex-dividend date = dividend payment date). At time 2 the firm stops its business. No personal tax incurred by debtholders. Personal tax rate incurred by individual shareholders is 15% on dividends and 5% on capital gains. Personal tax rate incurred by institutional shareholders is 0% on dividends and 22% on capital gains. Firm Fs corporate tax rate is 20%. Remark: The notation t+ stands for time t right after cash-flows have been paid. (a) (2 points) Compute the cash-flows to debtholders at time 1 and 2 (CF B(1), CF B(2)) 2 (b) (2 points) Compute the cash-flows to the state (coming from corporate taxes only) at time 1 and 2 (CF T (1), CF T (2)) (c) (2 points) Assume that shareholders are all individuals. Compute the after-tax cash-flows to individual shareholders at time 1 and 2 (CF Si(1), CF Si(2)) 3 (d) (2 points) Assume that shareholders are all institutions. Compute the after-tax cash-flows to institutional shareholders at time 1 and 2 (CF Sf (1), CF Sf (2)) Assume that the after-tax expected return on equity has the following features: Between time 0 and 1+: 15% for individuals and 20% for institutions. Between time 1+ and 2: 20% for individuals and 15% for institutions. (e) (2 points) Compute the value of equity at time 1+ when shareholders are all individuals (S i (1+)). 4 (f) (2 points) Compute the value of equity at time 1+ when shareholders are all institutions (S f (1+)). (g) (2 points) Compute the value of equity at time 0 when shareholders are all individuals (S i ). Hint: Do as if the stock was bought at time 0 and sold at time 1+. 5 (h) (2 points) Compute the value of equity at time 0 when shareholders are all institutions (S f ). Hint: Do as if the stock was bought at time 0 and sold at time 1+. (i) (2 points) Compute the value of debt at time 0 (B) 6 (j) (2 points) Compute the value of the firm at time 0 when shareholders are all individuals (Ai ) (k) (2 points) Compute the value of the firm at time 0 when shareholders are all institutions (Af ) (l) (2 points) What kind of shareholders does firm F have to attract to maximize firm value (individuals or institutions)?