Unilever Co. and Lever Co. are two identical companies in all aspects except for their capital structures. Unilever Co. is an all-equity-financed company, with a total market value of $600,000; whereas Lever Co.s capital structure contains both stock and perpetual coupon-only bonds with annual coupons of $18,000. Yield-to-maturity is 9%. Both companies EBIT is $75,000. Assume no taxes, and lending rate = borrowing rate.

a). What is the market value of Lever Co.s perpetual bond (2%)? What is the Debt-to-Equity ratio of Lever Co.?

An investor holding $30,000 of Levers stocks want to mimic the exact cash incomes and ROE as holding Unilever's stocks. The investor can borrow at the same 9% interest rate (i.e. homemade leverage).

b). What is the ROE of Unilever Co. and Lever Co.? How the investor can generate the exact cash incomes and ROE as the Lever Co.s stocks

Now suppose that the tax rate is 30% and Lever Co. has 10,000 shares outstanding. Further, assume that the company wants to reduce the debt level to $100,000 by issuing new shares. The company still generates an EBIT of $75,000.

c). What is the firm value (sum of debt and equity) of Lever Co. before (2%) and after (2%) the reduction of debt level? How many shares the company should buy back (2%)? (Assume the company can buy back non-integer numbers of shares.) Other things being held equal, is it wise for Level Co. to reduce its debt level and why (3%)? In real-world, suggest two potential motivations for a firm to reduce the debt level ?