1. The personal tax rate on debt is 21% and the personal tax on equity is 10%. The corporate tax rate is 15%. There is a firm, initially with no debt and market value $3 billion. This firm decides to issue $200 million of perpetual risk-free debt paying the riskfree interest rate of 3%. The proceeds from the sale of debt are used to buy back shares at a price appropriately reflecting the gains from leverage. What is the new value of the remaining equity in the firm?
2. There are two firms, Hello and olleH. Each has expected Net Operating Income (NOI) of $18 million each year forever, and the cash flow to Hello will always be exactly the same as that to olleH, whether it ends up above or below the expected amount. Hello is all equity (stock). olleH has some equity, along with $100 million in debt (market value and face value). olleH’s debt pays 5% interest at the end of each year, and olleH has expected return on its equity of 6.5%. There are no taxes, and the rest of the Modigliani-Miller assumptions hold.?