Suppose the corporate tax rate is 35%. Consider a firm thatearns $2,000 in earnings before interest and taxes each year withno risk. The? firm's capital expenditures equal its depreciationexpenses each? year, and it will have no changes to its net workingcapital. The? risk-free interest rate is 7%.
a. Suppose the firm has no debt and pays out its net income as adividend each year. What is the value of the? firm's equity?
b. Suppose instead the firm makes interest payments of $ 1,400per year. What is the value of? equity? What is the value of?debt?
c. What is the difference between the total value of the firmwith leverage and without? leverage?
d. To what percentage of the value of the debt is the differencein part ?(c?) ?equal?
