Your firm will have annual earnings (before interest and taxes) of $1 million in year 1 (now 2 is year 0). The earnings will grow at 5% annually forever. The tax rate is 35%. The firm has $400,000 of outstanding debt, on which it has to pay 5% annual interest rate, and its unlevered cost of capital is 12%. The tax rate for years 1-14 is 35%, but it will drop to 25% for year 15 and will stay at that value forever. The debt is assumed to stay constant. What is the value of the firm? a) (1 point) What is the value of the firm? b) (1 point) Your industry decides to hire a lawyer, which will negotiate with the government that the tax decrease will happen in year 10 instead of year 15 (that is only earnings in years 1-9 will be taxed at 35% rate). What is the maximum amount your firm will be willing to contribute in order to hire the lawyer?

Answer rating: 100% (QA)

a The value of the firm can be calculated using the discounted cash flow DCF approach We need to fir... View the full answer