Wham Corp. is financed entirely by equity at the cost of 12%. The firm is expected to generate a level, perpetual stream of earnings of $1,000 per year. It operates in a perfect market except for taxation at the rate of 40%.

(a) Compute the net cash flow per year and the value of the unlevered firm.

(b) Now assume the firm borrows $3,000 at a debt cost of 8%.

(c) Compute the value of the levered firm and account for the difference in your answer for the unlevered firm.