Practice problem $3$:

Given the following::

EBIT $=$ $$400,000$

The rate of return currently required by shareholders is $12\%$ if it is all equity firm.

Currently the firm has $$800,000$ in debt.

TC $=35\%$

TB $=15\%$

TS $=0\mathrm{.}0$

Financial distress costs are approximately $5\%$ of total debt value

a$)$ What is the added value of debt? That is$,$ find the gain from FL $($Answer: $$148,235)$

b$)$ Find VL $($ answer: $$2,314,902)$