Suppose the risk-free rate is 4.00%, and the expected return of the market is 12.00%. The corporate tax rate is τC = 35%, and personal tax rates on debt and equity are τD = τE = 31%. Consider a firm which generates a cash flow every year, and is expected to continue forever. Although the cash flow is risky, its expected value each year is $288 million. The firm currently has no debt, and the beta coefficient of its equity has been estimated at β = 1.3. What is the value of the firm (and therefore also the value of the equity)? Throughout the remainder, assume the firm has just issued $700 million in debt, and used the cash raised to buy back an equal value of equity. The firm is expected to continue to operate the same way it always has (so the recapitalisation does not result in any change in the firm’s operations), and plans to maintain the same debt level forever. Analysts agree that at this level, the debt is essentially risk-free. They also feel that the firm will almost certainly have sufficient income each year to take full advantage of the tax deductibility of the interest.