Panda Corporation has no debt and is expected to have EBIT of $10 million every year. Its cost of capital is 9%. Assume there are no taxes and no bankruptcy costs. Suppose that the company issues $25 million of debt and uses the cash to repurchase equity.

a. What is the total value of Lion before the debt issue?

b. What will be the total value of Lion after the debt issue?

c. Name the principle you used to answer part b, or state it in one sentence.

d. What will be the value of Lions equity after the change in capital structure?

e. What is the new debt-to-equity ratio?

Now suppose that there are corporate taxes with a rate of 20%.

f. What is the value of Lion before the debt issue?

g. What is the present value of all future interest tax shields?

h. What is the new total value of Lion Corporation?

i. What is the new value of Powers equity? (Hint: V = D + E)

j. What is the new debt-to-equity ratio?