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1. Consider all-equity firm A with equity beta u = 0.5. The corporate tax rate is given by t = 30%, the risk-free rate is
1. Consider all-equity firm A with equity beta u = 0.5. The corporate tax rate is given by t = 30%, the risk-free rate is given by rf = 2%, and the market risk premium is given by MRP = 8%. The firm's anticipated credit rating and CoD at different debt-capital ratios is given by: B 10% 20% 30% 40% 50% 60% 70% 80% 90% Rating A A B B C C D D D COD | 2% 2% 4% 4% 10% 10% 20% 20% 20% (a) Compute A's cost of equity and cost of capital at the initial capital structure. (b) Compute the default spread associated with the four different ratings. (c) Compute A's optimal debt-capital ratio. (d) Assume A generates a constant FCFF equal to $20 forever. What is A's firm value at the initial capital structure? What is A's firm value at the optimal capital structure
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