Fortune Enterprises is an all-equity firm that is considering issuing $13.5 million of perpetual debt. The interest rate is 10%. The firm will use the proceeds of the bond sale to repurchase equity. Fortune distributes all earnings available to stockholders immediately as dividends. The firm will generate $3 million of earnings before interest and taxes (EBIT) every year into perpetuity. Fortune is subject to a corporate tax rate of 40%. Suppose the personal tax rate on interest income is 55%, and the personal tax rate on equity income is 20%. What is the annual after-tax cash flow to equity holders under each plan?

a. Equity holders get $1.2 mil. under the unlevered plan vs. 0.66 mil. under the levered plan

b. Equity holders get $1.44 mil. under the unlevered plan vs. 0.792 under the levered plan

c. Equity holders get $1.9 mil. under the unlevered plan vs. 0.99 mil. under the levered plan

d. Equity holders get $1.52 mil. under the unlevered plan vs. 0.608 mil. under the levered plan

What is the annual after-tax cash flow to debt holders under each plan in Q7?

a. Debt holders get $0 mil. under the unlevered plan vs. 0.66 mil. under the levered plan

b. Debt holders get $0 mil. under the unlevered plan vs. 0.6075 mil. under the levered plan

c. Debt holders get $1.2 mil. under the unlevered plan vs. 0.66 mil. under the levered plan

d. Debt holders get $0 mil. under the unlevered plan vs. 1.2 mil. under the levered plan