1. An unlevered corporation has net income of $60000 and a required rate of return of 14%. What would the value of this firm be if it borrowed $140000 to buy back some of its stock? Assume a corporate tax rate of 40%.?
2. Assume that capital markets are perfect. If a firm finances its operations with $40000 in common stock with a required return of 17% and $16000 in bonds with a required return of 7%, what would happen to the required rate of return on the common stock if the firm issues $15000 in additional bonds at 7% to retire $15000 worth of equity??
3. Consider a firm with $5000000 in total debt, a corporate tax rate of 30 percent, and a personal tax rate on interest income of 40 percent. According to the gains from leverage equation , at what personal tax rate on income from stock should the firm be indifferent to using more or less borrowing? If the firm's total borrowings were twice as large, how does you answer change?