Your firm is unlevered and pays no corporate taxes. It has an annual EBIT of $$4,500,000$ in perpetuity, and the firm$$s shareholders require a $15\%$ return.

$18.$ What is the current value of this firm?

A$)$ $$450,000$

B$)$ $$2,750,000$

C$)$ $$18,000,000$

D$)$ $$30,000,000$

E$)$ There is not enough information.

$19.$ Now suppose that your firm pays a corporate tax rate of $40\%$ and all other details are as given. What would happen to the value of your firm if it decided to add $$2,500,000$ of debt at $5\%$ interest and use the proceeds to buy back shares?

A$)$ The value of the firm would remain unchanged after the recapitalization.

B$)$ The value of the firm would decrease by $$125,000$ after the recapitalization.

C$)$ The value of the firm would increase by $$125,000$ after the recapitalization.

D$)$ The value of the firm would increase by $$1,000,000$ after the recapitalization.

E$)$ The value of the firm would decrease by $$1,000,000$ after the recapitalization.

$20.$ Your firm is going to borrow $$12$ million by issuing $30-$year bonds. Your firm$$s cost of debt is $5\%$ and its tax rate will remain at $40\%$ for at least the next $30$ years. If the debt will not be renewed after $30$ years, by how much does the interest tax shield increase the firm$$s value?

A$)$ $$5,534,082$

B$)$ $$461,174$

C$)$ $$3,689,388$

D$)$ $$2,491,118$

E$)$ $$4,800,000$