Suppose the Kumar Corporation has no debt and is asking whether issuance of debt can increase the companys value. The firm has annual earnings before interest and taxes of $8,000,000. Their proposal is to borrow $6,000,000 in the form of perpetual debt (i.e., debt that never matures). The companys management decides that the cost of equity (before taking on debt) is 12%. Kumar is planning to buy back its stock with the entire amount borrowed. The companys tax bracket is 35%.

1. Compute the companys unlevered value.
2. Compute the companys value after they borrow.
3. You know the companys financial data and conclude that they made a mistake while computing the cost of equity. You estimate the correct beta for unlevered firm to be 1.2. Assume the risk-free interest rate is 7% and the expected return on the market is 12%. Re-calculate the value of the unlevered company, and recalculate the value of the company with borrowing.