The M&M theory states that in the presence of differential taxes, the value of the firm may rise by a portion of the amount borrowed. Given the following data,

C= corporate tax rate ( e.g., 21%)

S= tax rate on income from common stock (e.g., 15%)

d=Tax rate on income from debt (e.g., 0.25%)

1. Calculate the value of the firm if it is currently an all-equity financed for $500 mil, and is issuing (selling) $150 mil in debt.
2. What is the added value as a result of leverage?
3. Does this refute M&M hypothesis regarding the independence of value of the firm and how it is financed?
4. Explain why M&M hypothesis is correct in that the value of a fruit garden depends on the overall profit resulting from its core business (net operating income NOI).