Question 1 Firm A currently has EBIT of $35,000 and is all-equity financed. EBIT is expected to stay at this level indefinitely. The firm pays corporate taxes equal to 34 percent of taxable income. The discount rate for the firm's projects is 10 percent. a) What is the market value of the firm? (10 marks) b) Now assume the firm issues $60,000 of perpetual debt paying interest of 5 percent per year, using the proceeds to retire equity. What will be the market value of the firm? Should the firm issue the debt? (5 marks) c) Now we further assume that this debt issue raises the probability of bankruptcy. The firm has a 25 percent chance of going bankrupt after 5 years. If it does go bankrupt, it will incur bankruptcy costs of $200,000. The discount rate is 10 percent. What is the NPV of financing side effects? Should the firm issue the debt? (5 marks) d) Which theory does this problem reflect? What is the major implication of this theory to capital structure? Discuss your answer briefly