International Health Associates (IHA) is just about to commence operations as an international health consulting firm. The firm will have assets of $10 million. It expects to earn a 16% return on these assets before taxes. Therefore, EBIT is 16% multiplied by $10 million. However, because of certain tax arrangements with foreign governments, IHA will not pay any taxes (tax rate = 0%). Management is trying to decide how to raise the required $10 million. It is known that the required rate of return for an all-equity firm in this business is 11%. In other words, R(Reu) = 11%. Further, IHA can borrow at a rate of R(Rd) = 6%.

Based on this information, answer the following questions.

4. According to MM without taxes, what will be the value of IHA if it uses no debt?

5. According to MM without taxes, what will be the value of IHA if it uses $6 million in debt at 6% debt interest?