Problem
The local gas station is privately owned. Currently, the business is all equity financed. The riskiness of cash flows in this industry, R_U, is 14%. Since the business has lots of cash flow, the owners think that can reduce their tax bill and increase the value of the overall business by issuing some debt.
Suppose they will borrow $600,000 today and plan to pay off $200,000 of debt each year. If their tax rate is 25%, the interest rate and cost of borrowing are both 6%, what is the overall increase in total firm value?