Suppose the Kumar Corporation has no debt and is asking whether issuance of debt canincrease the company’s value. The firm has annual earnings before interest and taxes of$8,000,000. Their proposal is to borrow $6,000,000 in the form of perpetual debt (i.e., debtthat never matures). The company’s management decides that the cost of equity for thecompany is 12%. Kumar is planning to buy back its stock with the entire amount borrowed.The company’s tax bracket is 35%.(a) Compute the company’s value if they borrow.(b) You know the company’s nancial data and conclude that they made a mistake whilecomputing the cost of equity. You estimate the correct beta for unlevered rm to be 1.2.Assume the risk-free interest rate is 7% and the market risk premium is 5%, Re-calculatethe value of the company with borrowing.