Deep See Ventures, a glass bottom boat company in Key Largo andseveral islands in the Caribbean, currently has an all-equitycapital structure. It has expected (perpetual) pre-tax operatingincome (EBIT) of $100,000 per year and a corporate tax rate of 40%.The personal tax rate on debt is 30% and the personal tax rate onequity is 15%. Assuming no financial distress costs, answer thefollowing questions.

a. If equity investors currently require an (unlevered) 12%return on their after-tax cash flows, what is the current marketvalue of Deep See? (Do not round intermediate results. Express youranswer in whole dollars.)

b. What is the new total firm market value if Deep Seerecapitalizes the firm by borrowing $200,000 as perpetual debt. (Donot round intermediate results and provide your answer in wholedollars.)

c. If you learned that the debt is risky and a large proportionof the assets are intangible, would you revise up or down thebenefit from leverage calculated in b.?

I. a: 833,333 b: 913,333 d. Revise up

II. a: 500,000 b: 580,000 c: Revise down

III. a: 425,000 b: 479,286 c: Revise up

IV. a: 425,000 b: 479,286 c: Revise down