Suppose the corporate tax rate is 40 consider a firm that, Ask an Expert

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Suppose the corporate tax rate is 40%. Consider a firm that earns $1000 before interest and taxes each year with no risk. The risk free rate is 5%.

A) Suppose the firm has no debt and pays out its net income as a dividend each year. What is the value of the unlevered firm?

B) Suppose instead the firm makes interest payments of $500 per year, i.e adds debt. What is the difference between the total value of the firm with leverage and without leverage?

Please show your work for both A and B

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Financial Management, Finance

Category:- Financial Management
Reference No.:- M92061126

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