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1. Consider two identical firms that generate the same before-tax income (n). Firm U is financed by equity only, while Firm L is financed by equity and debt. An investor is considering two investments: Investment 1: 80% stake in Firm U Investment 2: 80% stake in Firm L's equity and 80% stake in Firm L's debt The following information is available. Vy=EU = $700 V = Ez + DL Y-20 ka= 5% (a) Calculate the cost and payoff associated with investment 1. If it is not possible to calculate a numerical value, state your answer as an explicit functional form. (5 marks) (b) Calculate the cost and payoff associated to investment 2. If it is not possible to calculate a numerical value, state your answer as an explicit functional form (5 marks) (c) What is the value of Firm L? (5 marks) Now assume that Ex =$50 and t = 25%. (d) Calculate the new costs and payoffs associated with investments 1 and 2. If it is not possible to calculate a numerical value, state your answer as an explicit functional form. (15 marks) (e) What is the value of Firm L? (15 marks) 1. Consider two identical firms that generate the same before-tax income (n). Firm U is financed by equity only, while Firm L is financed by equity and debt. An investor is considering two investments: Investment 1: 80% stake in Firm U Investment 2: 80% stake in Firm L's equity and 80% stake in Firm L's debt The following information is available. Vy=EU = $700 V = Ez + DL Y-20 ka= 5% (a) Calculate the cost and payoff associated with investment 1. If it is not possible to calculate a numerical value, state your answer as an explicit functional form. (5 marks) (b) Calculate the cost and payoff associated to investment 2. If it is not possible to calculate a numerical value, state your answer as an explicit functional form (5 marks) (c) What is the value of Firm L? (5 marks) Now assume that Ex =$50 and t = 25%. (d) Calculate the new costs and payoffs associated with investments 1 and 2. If it is not possible to calculate a numerical value, state your answer as an explicit functional form. (15 marks) (e) What is the value of Firm L? (15 marks)

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