Consider firm B as an unlevered firm and firm C as a levered firm with target debt-to-equity ratio (B/S)* = 1. Both firms have exactly the same perpetual net operating income, NOI - 180, before taxes. The before-tax cost of debt, kb, is the same as the risk-free rate. The corporate tax rate = .5. Given the following market parameters:

(a) Find the cost of capital and value for each firm. (Ignore any effect from personal income taxes.)
(b) Evaluate the following four projects to determine their acceptance (or rejection) by firms B and C. What do the results of this evaluation tell you about leverage in a world with corporate taxes but no personal taxes? (rjm is the correlation between the unlevered free cash flows of each project and the market.)

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E(NOI) (After-tax) im Correlation of j with the Market Project, Cost, I100 2 120 80 4 150 "; 9 .10 9 .12 18 20