You are assigned to value the equity of the Atlantic Manufacturing Company (AMC). AMC is in a mature business and generates a perpetual EBIT of $500,000 per year. The firm does not grow and its maintenance capital expenditure just offsets its annual depreciation expenses. Currently, AMC has no financial debt (borrowed funds) and its cost of equity is 10%. Assume AMC is subject to a 40% corporate tax rate and cost of bankruptcy is negligible.

Answer the following questions:

1. What is the value of AMCs equity before the firm issues debt?

2. AMC is considering issuing $1,000,000 of perpetual debt. After consulting with a rating agency, you find out that debt with the same risk as AMCs has an annual interest rate of 5%. Assume that the assumptions for MM hold, what is AMCs annual cash flow to equity-holders (this is the cash flow that is distributed to all equity-holders)?

3. What is AMCs total firm value after the debt issue?