2.

a. (1) Value if unlevered (in thousands):

Chapter 9 Theory of Capital S t r u c t u r e 285 EBIT $ 3,000 Profit before taxes 3,000 Taxes 1,200 Profit after taxes .$Tm =

1; required equity return .18 Value if unlevered $-10,000 ($10 million) ,

(2) Value with $4 million in debt:

Value = Value if unlevered + Value of tax shield Value = $10,000 + .40($4,000) = $11,600