For instructions on using Thomson ONE: Business School Edition, refer to the instructions provided with the Thomson ONE: Business School Edition problems at the end of Chapters 1–6 or to “A Guide for...

For instructions on using Thomson ONE: Business School Edition, refer to the instructions provided with the Thomson ONE: Business School Edition problems at the end of Chapters 1–6 or to “A Guide for Using Thomson ONE: Business School Edition.” P12-23. How does the value of an unlevered fi rm change if it takes on debt in a perfect capital market? Abercrombie & Fitch (ticker: ANF) is an all-equity fi rm. Using the latest year’s net operating income (EBIT) and its weighted average cost of capital (WACC), calculate the value of ANF. If the company decides to change its debt-to-equity ratio to 0.5, by issuing debt and by using the proceeds to repurchase stock, what will ANF’s value be after the change in capital structure? Assume that its cost of debt is one quarter of its cost of equity and that markets are perfect. What happens to its cost of equity after the new debt is issued? What is likely to happen to ANF’s equity beta after debt is issued? P12-24. How does the value of an unlevered fi rm change if it takes on debt in the presence of corporate taxes? Repeat the analysis for ANF from the previous problem, after relaxing only the “no corporate tax” assumption of perfect capital markets. Use the average tax rate (income taxes divided by pretax income from the income statement) for the latest available year. What is the value of ANF after it issues debt? What is the benefi t of issuing debt when there are corporate taxes? How will the beta for a levered ANF, in the presence of corporate taxes, compare to that of an all-equity ANF and that of a levered ANF, in perfect capital markets? When capital markets are perfect, except for corporate taxes, what is the optimal level of debt the company should issue? In reality, do we observe fi rms that maintain this optimal level of debt? Why or why not?