1. What is the potential impact of increasing amounts of debt financing on return on equity (ROE) and risk (standard deviation of ROE in each case and coefficient of variation)?

Probability	Ebit
o.25	2,500,000
0.50	3,000,000
0.25	3,500,000

(Paul plans to construct partial income statements (beginning with EBIT) for four levels of debt as measured by the book value Total debt/ Total assets ratio: zero, 25%, 50%, and 75%. For this analysis, which will not be used to make the actual capital structure decision, Paul intends to use a cost of debt of 10% regardless of the amount of debt financing used.)

2. What is the potential impact of increasing amounts of debt financing on the stock price and the CCC? (Use the expected EBIT of $3,000,000 in all the calculations and use the formulas on page 127 in the Case book). Do the calculations for all the hypothetical levels of debt as well as the corresponding cost of equity and debt given in exhibit 19.1

3. Show on a graph the relationship between the CCC and the value of equity at different levels of debt based on your calculations .

At what amount of debt is the optimal capital structure based on your calculations in question 2.

4. Suppose that Tiffany is interested in estimating the value of the firm at a debt level of $7,500,000, what would be the value of firm under the MM with corporate taxes and under the Miller model?

Exhibit 19.1: Estimated Cost of Debt and Equity at Different Amounts of Debt Financing

Amount Borrowed	Cost of Debt	Cost of Equity
0	--	15%
2500000	10%	15.5
5000000	11	16.5
7500000	13	18
10000000	16	20
12500000	20	25

Healthcare Franchise Industry Data: Debt Ratings at Different Levels of Debt Ratio

Percentile	Debt Ratio	Debt Rating
10th	10%	AAA
25th	25	AA
40th	35	A
Median	50	BBB
60th	65	BB
75th	75	B
90th	82	C

Estimated Cost of Debt and Equity at Different Amounts of Debt Financing Under Different Business Risk Levels

Amount Borrowed	Cost of Debt	Cost of Equity
0	--	16%
2500000	11%	17
5000000	13	19
7500000	16	22
10000000	20	26
12500000	25	31

Amount Borrowed	Cost of Debt	Cost of Equity
0	--	14%
2500000	9%	14.3
5000000	9.5	15
7500000	10.5	16
10000000	12.5	17.5
12500000	15.5	20.0