Questions 15-25 -
New and Improved Capital Structure…now with taxes!!
Assume now that the firm was once again all equity financed (i.e. before the
restructuring), and everything else is the same except that the tax rate was 35%.
Compute the income statement for the firm in both states of the world (Hot and Cold).
What is the expected dividend per share?
Discounting the unlevered cash flows by the cost of equity of the unlevered firm
(calculated in #3 above), what is the value of the unlevered firm when there are taxes?
What is the price per share?