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Suppose the corporate tax rate is 40%. Consider a firm that earns $1000 before interest and taxes each year with no risk. The risk-free interest
Suppose the corporate tax rate is 40%. Consider a firm that earns $1000 before interest and taxes each year with no risk. The risk-free interest rate is 5%. (Please show steps and formulas)
- Suppose the firm has no debt and pays out its net income as dividend each year. What is the value of the firms equity?
- Suppose instead the firm makes interest payments of $500 per year on a perpetual bond. What is the value of equity? What is the value of debt?
- What is the difference between the total value of the firm with leverage and without leverage?
- To what percentage of the value of the debt is the difference in part 3. equal?
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