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Problem 3: Deep See Ventures, a glass bottom boat company in Key Largo and several islands in the Caribbean, currently has an all-equity capital structure. It has an expected operating income of EBIT=$100,000 per year (as a perpetuity) and a corporate tax rate of Tc=40%. The personal tax rate on debt is TD=30% and the personal tax rate on equity is TE=15%. Assuming no bankruptcy (or agency/insider information) costs, answer the following questions: A. If equity investors require a 12% return on their after-tax cash flows, what is Deep See currently worth? B. What is the new firm value if Deep See recapitalizes the firm by borrowing $200,000 as perpetual debt at par? The coupon rate on the debt is 5%. (Note: The market value of the debt is $200,000). C. If you learned that the debt is risky and a large proportion of the assets are intangible, would you revise up or down the gain from leverage calculated in 2? Why?

          Problem 3:
Deep See Ventures, a glass bottom boat company in Key Largo and several islands in the Caribbean, currently has an all-equity capital structure. It has an expected operating income of EBIT=$100,000 per year (as a perpetuity) and a corporate tax rate of Tc=40%. The personal tax rate on debt is TD=30% and the personal tax rate on equity is TE=15%. Assuming no bankruptcy (or agency/insider information) costs, answer the following questions:

A. If equity investors require a 12% return on their after-tax cash flows, what is Deep See currently worth?
B. What is the new firm value if Deep See recapitalizes the firm by borrowing $200,000 as perpetual debt at par? The coupon rate on the debt is 5%. (Note: The market value of the debt is $200,000).
C. If you learned that the debt is risky and a large proportion of the assets are intangible, would you revise up or down the gain from leverage calculated in 2? Why?

Problem 3:
Deep See Ventures, a glass bottom boat company in Key Largo and several islands in the Caribbean, currently has an all-equity capital structure. It has an expected operating income of EBIT=100,000 per year (as a perpetuity) and a corporate tax rate of Tc=40%. The personal tax rate on debt is TD=30% and the personal tax rate on equity is TE=15%. Assuming no bankruptcy (or agency/insider information) costs, answer the following questions:

A. If equity investors require a 12% return on their after-tax cash flows, what is Deep See currently worth?
B. What is the new firm value if Deep See recapitalizes the firm by borrowing200,000 as perpetual debt at par? The coupon rate on the debt is 5%. (Note: The market value of the debt is $200,000).
C. If you learned that the debt is risky and a large proportion of the assets are intangible, would you revise up or down the gain from leverage calculated in 2? Why?

Added by Diane B.

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