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The Hatfield Corporation is a zero growth firm with an expected EBIT of $250,000 and a...

The Hatfield Corporation is a zero growth firm with an expected EBIT of $250,000 and a corporate tax rate of 40 percent. Hatfield uses $1 million of debt financing, and the cost of equity to an unlevered firm in the same risk class is 15 percent. What is the value of the firm according to MM with corporate taxes? According to MM with corporate taxes, what is the firm’s cost of equity if its cost of debt is 10 percent? Suppose the personal tax rates on Hatfield’s investors are 30 percent on debt (interest) income and 20 percent (on average) on income from stocks. Suppose in a world with personal tax, the cost of equity to an unlevered firm is 18.75%.

What is the firm’s value according to Miller model? What is the trade-off theory? Please briefly explain.

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