1. Provide Modigliani and Miller's explanation of how debt affects firm value and the WACC. Begin with the perfect (no taxes) case and expand it to the world with taxes. 2. Use at least 2 graphs for the no tax case and 2 graphs for the taxes case. Be sure to explain what is in the graphs. 3. Complete your explanation with the Trade-off Theory and how it affects firm value and WACC. 4. Compton Corporation currently has no debt in its capital structure. As an unlevered firm, its cost of equity is 13 percent. It is considering substituting $8,000 in debt at 6 percent interest. The EBIT for the firm is $5,000 under either scenario, and the tax rate is 35 percent. Unlevered Firm Levered Firm EBIT $5,000 $5,000 Interest 0 480 EBT 5,000 4,520 Taxes (135) 1.750 1.582 Net Income 3,250 2,938 What is the value of the unlevered firm? a. $16,000 b. $17,500 $25,000 d. $32,500 How much value will be added to the firm by substituting $8,000 in debt? $1,688 b. $1,750 $2.800 d. $3,250 a. C. b. a. C. c. Calculate the cost of equity for the levered firm