Consider a growing firm that is expected to produce earnings of $10 million next year. The firm's earnings growth rates are 15% per annum. The firm's cost of capital is 20%. I ts tax rate is 0.

1: What is the market value of this firm?

2: What is the firm's P/E ratio if it has no debt?

3: Now assume that the cost of capital for debt of $100 million is 8%, while the cost of capital for the remaining levered equity is 32%.  (Again, the weighted average cost of capital is 50%·8%+50%·32% = 20%, so the firm's cost of capital has not changed.) Interest on the $100 million debt is paid out. What is the equity's P/E ratio now?

4: Has the increase in debt increased or decreased the firm's P/E ratio?