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Running Header: Public Finance 1 Public Finance Student’s Name Professor’s Name Course Title Date 2 Public Finance QUESTION ONE 𝐸𝑓𝑓𝑒𝑐𝑑𝑖𝑣𝑒 π‘Žπ‘“π‘‘π‘’π‘Ÿ βˆ’ π‘‘π‘Žπ‘₯ π‘–π‘›π‘‘π‘’π‘Ÿπ‘’π‘ π‘‘ 𝑒π‘₯𝑝𝑒𝑛𝑠𝑒 = π‘–π‘›π‘‘π‘’π‘Ÿπ‘’π‘ π‘‘ 𝑒π‘₯𝑝𝑒𝑛𝑠𝑒 Γ— (1 βˆ’ π‘‡π‘Žπ‘₯ π‘…π‘Žπ‘‘π‘’) = $70000 Γ— (1 βˆ’ 0.30) = $70000 Γ— 0.70 = $ 49,000 QUESTION TWO Give that Estimated Market Value (A) = 400,000 and Debt (D) = 225,000 Equity = πΈπ‘ π‘‘π‘–π‘šπ‘Žπ‘‘π‘’π‘‘ π‘€π‘Žπ‘Ÿπ‘˜π‘’π‘‘ π‘‰π‘Žπ‘™π‘’π‘’ βˆ’ 𝐷𝑒𝑏𝑑 = 400,000 βˆ’ 225,000 = 175,000 𝐸/𝐴 = (175,000/400,000) = 0.4375 𝐷/𝐴 = (225,000/400,000) = 0.5625 3 Public Finance QUESTION THREE Given that, π‘€π‘Žπ‘‘π‘’π‘Ÿπ‘–π‘‘π‘¦ = 8% Tax rate = 30% Effective cost = π‘šπ‘Žπ‘‘π‘’π‘Ÿπ‘–π‘‘π‘¦ (1 βˆ’ % π‘‘π‘Žπ‘₯ π‘Ÿπ‘Žπ‘‘π‘’) = 8(1 βˆ’ 0.30) = 5.60% QUESTION FOUR Cost of equity = (π‘…π‘–π‘ π‘˜ π‘“π‘Ÿπ‘’π‘’ π‘Ÿπ‘Žπ‘‘π‘’ + π΅π‘’π‘‘π‘Ž Γ— π‘€π‘Žπ‘Ÿπ‘˜π‘’π‘‘ π‘Ÿπ‘–π‘ π‘˜ π‘π‘Ÿπ‘’π‘šπ‘–π‘’π‘š) = 3% + 2 Γ— 9% = 21% After tax cost of debt = πΆπ‘œπ‘ π‘‘ π‘œπ‘“ ...
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