Smoke and Mirrors currently has EBIT of $30,000 and is all-equity-financed. EBIT is expected to stay at this level indefinitely. The firm pays corporate taxes equal to 32% of taxable income. The discount rate for the firms projects is 8%.

a.	What is the market value of the firm? (Round your answer to 2 decimal places.)
	Market value of the firm $

b.	Now assume the firm issues $40,000 of debt paying interest of 6% per year and uses the proceeds to retire equity. The debt is expected to be permanent. What will happen to the total value of the firm (debt plus equity)?
	The total value of the firm (Click to select)decreasesincreases by $.

c.	Recompute your answer to part (b) under the following assumptions: the debt issue raises the possibility of bankruptcy; the firm has a 35% chance of going bankrupt after 4 years; if it does go bankrupt, it will incur bankruptcy costs of $220,000. The discount rate is 8%. (Round your answer to 4 decimal places.)
	PV of the expected cost of bankruptcy $

	Should the firm issue the debt?
	The firm (Click to select)should notShould issue the debt.