Problem 1: An unlevered (all-equity) firm has 360,000 common shares trading at $50 per share. With its investment plan fixed, it is expected to generate a perpetual EBIT stream of $3 million per year. The corporate tax rate is 40%. The firm is contemplating taking on debt by issuing a $12 million face value perpetual bond carrying 4% coupon interest per year and using the proceeds to retire some of its stock outstanding. Ignoring personal taxes:

Refer to Problem 1. Suppose investors are subject to 30% personal tax rate on dividend income and 40% personal tax rate on interest income. Based on this information and the information in Problem 1: a) What will be the market value of the firm's equity after the change in its capital structure? b) What will be the share price after the change in the firm's capital structure? c) What is the difference in the values of the tax-shields in Problems 1 and 2 due to the firm's change in its capital structure? Refer to Problem 1. Suppose investors are subject to 30% personal tax rate on dividend income and 40% personal tax rate on interest income. Based on this information and the information in Problem 1: a) What will be the market value of the firm's equity after the change in its capital structure? b) What will be the share price after the change in the firm's capital structure? c) What is the difference in the values of the tax-shields in Problems 1 and 2 due to the firm's change in its capital structure