16.30. Compute a graph similar to Exhibit 16.2. Use a spreadsheet. Your firm will be worth either $50,000 or $100,000 with equal probabilities. The cost of capital on your debt is given by the formula 8( rDebt) = 5% + 10% co Debt-but only if the debt is risky. (Hint: The risk-free rate of return is 11.85%. What is the WACC of the firm if it is 100% debt fi-nanced?

Exhibit 16.2 below:

Capital Structure in a Perfect Binomial Payoffs (as in the text) 140 e 120 120 100 100 Equity, Expected 2 80 60 40 20 0 WACC Bond, Promised Bond, Expected 80 100 60 0 20 40 Debt Ratio, in % Normally Distributed Payoffs 100 80 E 60 6 40 Equity, Expected WACC 20 Bond, Expected 20 40 60 80 100 Debt Ratio, in % Exhibit 16.2: The Cost of Capital in a Pe ect World. The top graph illustrates the binomial example worke in the table in the text. Until the debt ratio reaches around 80% of the firm value, the debt is risk-free. Ho more debt still increases the risk of equity, and therefore its expected rate of return. For debt ratios highe 80%, the debt is risky and has to offer a higher promised and expected rate of return. The lower grap a similar figure for a firm that has normally distributed payoffs. In both cases, the WACC is always th regardless of the mix of debt and equity