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Massey-Moss Corporation has a perpetual EBIT of $3 million and a40% tax rate. Let’s assume that depreciation expense is zero. It isable to borrow at an interest rate of 14%, whereas its requiredrate of return on equity in the absence of borrowing is 18%.a. In the absence of personal taxes, what is the value of the firmwhen it has no debt? When it has $4 million in debt?b. If the marginal personal tax rates on stock and bond income are25% and 30%, respectively, determine the value of the firm when ithas no debt and when it has $4 million in debt.
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