1.Baxter has historically maintained a debt-equity ratio of approximately 0.25. The firm enjoys very stable demand for its products, and consequently can borrow at 4.20%, just 20 basis points over the risk-free rate of 4%. Baxter's tax rate is 40%. Current market value of Baxter (including debt and equity) is 120 m. The company is expected to have free cash flows of $10 billion in perpetuity

Baxter believes it can increase debt without any serious risk of distress or other costs. With a higher debt-equity ratio of 0.50, it believes its borrowing costs will rise only slightly to 4.50%.

a)Determine Baxter's r_WACC before the recapitalization and r_A

b)If Baxter announces that it will raise its debt-equity ratio to 0.5 through a leveraged recapitalization, determine its new WACC

c)Determine the increase in the company value that would result from the anticipated tax savings.