The Mandem Co., has a debt ratio of 33%. The firms required return on unlevered equity is 17%, and the pre-tax cost of debt is 9%. Sales revenues are expected to be $32.5 million in perpetuity and variable costs are expected to be 55% of sales. The tax rate is 35%, and the company pays out all earnings as dividends at the end of each year.

a. If the company were financed only by equity, what would it be worth? (10 pts)

b. what would M&M say is the value of the leveraged firms equity? (20 pts)

r_{leveraged equity} = r_{unleveraged equity} + (D/E)( r_{unleveraged equity} r_Debt)(1 T_C)