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Unlevered Firm Levered Firm Balance Sheet Liabilities 100,000 Balance Sheet Liabilities Assets Assets Equity Equity 100,000 100,000 100,000 100,000 100,000 Rd = = 5% Tax rate = 35% Price per share: Number of shares: $ 10.00 10,000 50,000 Income Statement EBIT 50,000 Interest expense Taxable income 50,000 Taxes (17,500) Net Income 32,500 Income Statement EBIT Interest expense Taxable income Taxes Net Income EPS ROE EPS ROE You have decided to issue debt and buy back 1/2 of your company's stock. 1. Restate the balance sheet and income statement to reflect this transaction. 2. What is the value of the unlevered firm? 3. What is the PV of the tax shield? 4. Should you do this transaction? Why or why not