1. [MM I: No corporate Taxes and No bankruptcy cost]

i. Lewis Corp. has a debt-equity ratio of 1. Its WACC is 8% and its cost of debt (RD) is 5%. Ignoring tax, what is its cost of equity (RE)?

ii. Its considering restructuring of a debt-equity ratio of 1.5. Calculate the WACC again.

iii. In ii, you should get a higher cost of equity, but the same WACC. Why is that?

2. [MM II: Corporate Taxes and No bankruptcy cost] In the problem 1, now consider corporate taxes of 21%.

i. What is the cost of equity (RE) when a D/E is 1? Compare with the problem 1-i. (Remind that the WACC in MM II case I is constant and the same with the unlevered cost of capital.)

ii. What is the WACC when a D/E is 1? Compare with the WACC in problem 1-i (WACC=8%).

iii. What is the cost of equity (RE) when a D/E is now 1.5? Compare with the problem 2-i.

iv. What is the WACC when a D/E is 1.5? Compare with the WACC in problem 1-ii.