3. (20 points) An all-equity financed confection company, MandyMargaret Candies Co., MMCC, has 10 million shares of common stock outstanding, which is trading on the NASDAQ for $30 per share. The stock's beta is 0.8. The market risk premium is 8% and the risk-free interest rate is 2%. Assume we are in case II, with corporate taxes and the corporate tax rate is 20%. We are also assuming no bankruptcy costs for this problem. The CFO, Peggy Banks, is convinced that MMCC should recapitalize the firm, borrowing $100 million (for which she believes the firm will be charged 4% interest per year) and using the proceeds to pay a one-time dividend to the common shareholders ($100 million). Assume the new debt is perpetual debt. Calculate the following for MMCC: a. The value of the unlevered firm: b. The cost of capital for the unlevered firm: c. The value of the annual interest tax shield on the new debt: d. The present value of all future interest tax shields on the new debt (PVITS) e. The Value of the Levered Firm (post-recapitalization): f. The Value of the Equity of the Firm (post-recapitalization): g. The required return on the equity of the levered firm: h. Demonstrate the impact of the recapitalization on the wealth of the shareholders of MMC: (next page is left blank) 3. (20 points) An all-equity financed confection company, MandyMargaret Candies Co., MMCC, has 10 million shares of common stock outstanding, which is trading on the NASDAQ for $30 per share. The stock's beta is 0.8. The market risk premium is 8% and the risk-free interest rate is 2%. Assume we are in case II, with corporate taxes and the corporate tax rate is 20%. We are also assuming no bankruptcy costs for this problem. The CFO, Peggy Banks, is convinced that MMCC should recapitalize the firm, borrowing $100 million (for which she believes the firm will be charged 4% interest per year) and using the proceeds to pay a one-time dividend to the common shareholders ($100 million). Assume the new debt is perpetual debt. Calculate the following for MMCC: a. The value of the unlevered firm: b. The cost of capital for the unlevered firm: c. The value of the annual interest tax shield on the new debt: d. The present value of all future interest tax shields on the new debt (PVITS) e. The Value of the Levered Firm (post-recapitalization): f. The Value of the Equity of the Firm (post-recapitalization): g. The required return on the equity of the levered firm: h. Demonstrate the impact of the recapitalization on the wealth of the shareholders of MMC: (next page is left blank)