1) Green and Kelly are identical in every respect except that Green is not levered, while Kelly has $1 million in risk-free debt. Assume that the corporate tax rate is 35% and that all cash flow streams are perpetuities. The net operating income (before tax) of the two firms is $500,000. The equity beta of Green is 1.5, the risk-free rate is 5%, and the expected rate of return on the market is 15%. Assume that the CAPM holds.

(a) (5 points) What is the WACC of Green?

(b) (5 points) What is the value of Green?

(c) (5 points) What is the value of Kelly?

(d) (5 points) What is the WACC of Kelly?

(e) (10 points) Suppose that Green issues $1.5 million in bonds and uses the proceeds to repurchase common stock. What is the new market value of the equity?