Gartner Systems has no debt and an equity cost of capital of 10.7%. Gartner’s current market capitalization is $98 million, and its free cash flows are expected to grow at 3.1% per year.

Gartner’s corporate tax rate is 34%. Investors pay tax rates of 35% on interest income and 21%

on equity income.

a. Suppose Gartner adds $53 million in permanent debt and uses the proceeds to repurchase shares. What will Gartner’s levered value be in this case?

b. Suppose instead Gartner decides to maintain a 50% debt-to-value ratio going forward. If Gartner’s debt cost of capital is 6.73%, what will Gartner’s levered value be in this case?