Question: 0% 2. Consider Table 1. Table 1 Firm Assets Debt Equity Cost of Cost of Corporate tax Personal tax rate | Personal tax rate unlevered

0% 2. Consider Table 1. Table 1 Firm Assets Debt Equity

0% 2. Consider Table 1. Table 1 Firm Assets Debt Equity Cost of Cost of Corporate tax Personal tax rate | Personal tax rate unlevered equity rate (%) on equity (%) I on debt (%) (%) 1 1000 100 15% 0% 0% 2 100 50 50 15% 20% 0% 0% 3 100 50 50 L 15% 20% 20% 10% 4 100 50 50 15% 20% 10% 20% Earnings Before Interest and Taxation (EBIT) is 50 for all firms. Cost of debt capital is 10% for all firms. (a) Consider Table 1. Present the income statement for firm 1. Calculate the value of Firm 1. (b) Consider Table 1. Calculate the interest expense, earnings after interest and before taxes, the tax liability, earnings after interest and taxation, and the total cashflow to shareholders and bondholders for Firm 2. Calculate the cost (required return) of levered equity for Firm 2. For Firm 2, plot firm value, after-tax WACC, and the cost (required return) of levered equity, and show how each changes as the firm uses more debt in its capital structure. (c) Consider Table 1. Calculate Miller's (1978) gain to leverage for Firm 3 given all taxes. Calculate the value of Firm 3. Is Firm 3 worth more or less than Firm 2? Explain. (d) Consider Table 1. Calculate the after-tax WACC for Firm 4. Calculate the value of Firm 4. Is Firm 4 worth more or less than Firm 3? Explain

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