Home Essay Help Service Suppose the corporate tax rate is 40%. Consider a firm that earns $1000 before interest and taxes each year with no risk

Suppose the corporate tax rate is 40%. Consider a firm that earns $1000 before interest and taxes each year with no risk

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January 4th, 2018

Suppose the corporate tax rate is 40%. Consider a firm that earns $1000 before interest andtaxes each year with no risk. The firm’s capital expenditures equal its depreciation expenses eachyear, and it will have no changes to its net working capital. The risk-free interest rate is 5%.a. Suppose the firm has no debt and pays out its net income as a dividend each year. What isthe value of the firm’s equity?b. Suppose instead the firm makes interest payments of $500 per year. What is the value ofequity? What is the value of debt?c. What is the difference between the total value of the firm with leverage and withoutleverage?d. The difference in part (c) is equal to what percentage of the value of the debt?

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