5. (15 points) Company ASDF has 10 million of common shares outstanding, traded at $70 per share. Market beta of those shares is 0.8. Expected market return is 6% and risk-free rate is 1%. The company also has 1 million of preferred stocks outstanding. Each stock is traded at $105, has dividend rate of 8% and par value of $100; dividends are paid annually. It also has two bond issues outstanding. Bond A matures in 10 years, has face value of $1,000 and coupon rate of 10% (coupons are paid annually). Current market price of bond A is $1,200. Bond B is a zero-coupon bond, with face value of $1,000. It matures in 5 years and is currently traded at 80% of par. There are 100,000 bonds of type A and 20,000 bonds of type B issued. Tax rate is 15%. (a) (7 points) What is capital structure of the company (that is, what are weights of equity and debt in the company's total value)? (b) (8 points) Suppose that ASDF plans to expand its operations by launching a project that has a risk profile common to existing ASDF's projects. What rate should be used to discount cash flows of such a project? 6. (20 points) Keystone Corporation most recent EBIT was $50,000; it is expected to grow at 2% per year forever. The company currently has no debt, and its cost of equity is 10%. The corporate tax rate is 30%. For simplicity, suppose that there will not be adjustments in capital spending and net working capital going forward. (a) (5 points) What is current value of the company? (b) (5 points) What will the value of the firm be if the company takes on debt equal to 40% of its unlevered value? Ignore any default considerations. (c) (5 points) How will your result of part (b) changes if the firm takes on debt equal to 40% of its levered value? (d) (5 points) What is firm's WACC in parts (a), (b) and (c)? Briefly comment on the differences