Suppose the corporate tax rate is 40 %40%. Consider a firm that earns $ 2 comma 500$2,500 before interest and taxes each year with no risk. The? firm's capital expenditures equal its depreciation expenses each? year, and it will have no changes to its net working capital. The? risk-free interest rate is 5 %5%.
a. Suppose the firm has no debt and pays out its net income as a dividend each year. What is the value of the firm's equity?
b. Suppose instead the firm makes interest payments of $ 700$700 per year. What is the value of equity?What is the value of debt?
c. What is the difference between the total value of the firm with leverage and without leverage?
d. The difference in ?(c?) is equal to what percentage of the value of the debt?