2) Thomsons Corporations is considering a change in its capital structure. THOMSONS CORPORATIONS currently has $20 million in debt carrying a rate of 8%, and its stock price is $40 per share with 2 million shares outstanding. THOMSONS CORPORATIONS is a zero-growth firm and pays out all of its earnings as dividends. The firms EBIT is $14.933 million, and it faces a 40% federal-plus-state tax rate. The market risk premium is 4%, and the risk-free rate is 6%. THOMSONS CORPORATIONS is considering increasing its debt level to a capital structure with 40% debt, based on market values, and repurchasing shares with the extra money that it borrows. THOMSONS CORPORATIONS will have to retire the old debt in order to issue new debt, and the rate on the new debt will be 9%. THOMSONS CORPORATIONS has a beta of 1.0.

Requirements

a. What is Thomsons Corporations unlevered beta? Use market value D/S when unlevering.

b. What are Thomsons Corporations new beta and cost of equity if it has 40% debt?

c. What are Thomsons Corporations WACC and total value of the firm with 40% debt?