Consider firm B as an unlevered firm and firm C as a levered firm with target debt-to-equity ratio (B/ = 1. Both firms have exactly the same perpetual net operating income, NOI = 180, before taxes. The before-tax cost of debt, kb, is the same as the risk-free rate. The corporate tax rate = .5. Given the following market parameters,
a) Find the cost of capital and value for each firm. [Ignore any effect from personal income taxes.]
b) Evaluate the following four projects to determine their acceptance (or rejection) by firms B and C. What do the results of this evaluation tell you about leverage in a world with corporate taxes but no personal taxes?
