Couglin Inc. has net operating income of $120,000 per year. Couglin uses no debt in its capital structure and the required rate of return to equity holders is 12 percent.
a. Calculate the value of the unlevered firm if the firm has a marginal tax rate of 0%.
b. Calculate the value of the unlevered firm if the firm has a marginal tax rate of 30%.
c. Interpret the difference in your findings to parts a. and b.
d. If your answer to part a. is less than your answer to part b, can we increase firm value by taking on debt? If so, will these benefits always continue as we add more and more debt?