Problem:
The Hatfields Corporation is a zero growth firm with an expected EBIT of $250,000 and corporate tax rate of 40 percent. Hatfields uses $1,000,000 of debt financing, and the cost of equity to an unlevered firm in the same risk class is 15%.
Required:
Question 1: What is the value of the firm according to MM with corporate taxes?
Question 2: What is the firm's cost of equity if its debt cost is 10 percent?
Note: Provide support for rationale.