USE EXCEL: At the end of one year, a$$firm$$s$$assets$$have$$a$$liquidating$$payoff$$of$$either$100$or$32$with$$probabilities$0\mathrm{.}7$and$0\mathrm{.}3$ respectively. The$$risk$$free$$rate$$is$5\%$per$$year$,$and$$the$$risk$$premium$$on$$the$$firm$$s$$assets$$is$5\%$per$$year$.$The$$firm$$has$$existing$$debt$$with$$a$$market$$value$$of$$$$20.$The$$corporate$$tax$$rate$$is$25\%.$Assume$$all$$other$$Modigliani$$Miller$$conditions$$hold$.$

a$.$ What is market value of equity?What is the market value of taxes?

b$.$ What is the expected rate of return on equity?

c$.$ The$$firm$$raises$$$$5$by$$issuing$$additional$$debt$$and$$uses$$to$$proceeds$$to$$pay$$a$$special$$one$$time$$dividend$$to$$existing$$shareholders$.$

i$.$ Is$$the$$newly$$issued$$debt$$risk$$free$?$How$$much$$does$$the$$firm$$have$$to$$promise$$to$$pay$$new$$lenders$$to$$be$$able$$to$$borrow$$an$$additional$$$$5?$

ii$.$ Is$$old$$debt$$still$$risk$$free$?$

iii. How$$much$$value$$would$$be$$created$$for$$shareholders$?$