Case I: Capital structure theory (no tax) WACC : 10%
Debt-to-firm value(D/V): 60%
Cost of debt : 6%
1) In Case I, when the debt-to-firm value decreases from 60% to 50%,
i) Figure out the new WACC. Does the capital structure affect WACC?
ii) Figure out the new WACC. Does the capital structure affect the cost of equity?
Case II: Capital structure theory (corporate tax)
EBIT : $40 million
Tax rate : 50%
Unlevered cost of capital : 10%
2) In Case II, when the debt increases from $0 to $40mil.,
i) Figure out the unlevered firm’s value.
ii) Figure out the levered firm’s value.
iii) What is the optimal capital structure? In other words, does the capital structure affect the WACC?