Strider Publishing Company, an all-equity firm, expects perpetual earnings before

interest and taxes (EBIT) of $2.5 million per year. Strider's after-tax, all-equity discount

rate is 20 percent. The firm is subject to a 34 percent corporate tax rate.

a. What is the value of Strider Publishing?

b. If Strider issues $600,000 of debt and uses the proceeds to repurchase stock, what

will the value of the firm be?

c. Explain the difference in your answers to (a) and (b).

d. What assumptions are you making when valuing Strider?

e. In the real world, how do changes in these assumptions impact the valuation?