The firm has the following financial information: Selected Company Financial Data:

Earnings before interest and tax () 400,000

Debt-to-equity ratio (market value) 0.00

Debt (market value) () 0

Weighted average cost of capital 10%

It has been estimated that the firms earnings before tax will remain constant forever. The firms marginal tax rate is 30%. The firms management has announced that it plans to issue 1,000,000 in debt in order to buy back an equivalent amount of equity. The management believes that this change in capital structure is reasonable. The firms before-tax cost of debt is 6%.

1) Based on the MM propositions with taxes, what is the value of the firm prior to debt issuance?

2) What is the value of the firm after issuing debt?

3) Based on the MM propositions (with corporate taxes), what is the firms cost of equity after the debt issuance?