6. (5 points) In t = = 0, Gallo Inc. is an unlevered company whose Beta is .5. The risk free-rate in the economy is 4%, and the market return is 8%. To begin with, assume that capital markets are perfect and Modigliani-Miller assumptions hold true. - (a) Determine the required cost of equity using CAPM. (b) Given your answer in part (a), suppose that in t 1 Gallo does a leveraged recapitalization, issuing risk-free debt and repurchasing stocks until its debt-equity ratio is 0.50. The rate of return on debt is 3% and the corporate tax rate is zero (Tc = 0). i. Compute the Beta of Gallo's equity after the recapitalization. ii. Will the Beta of Gallo change after the recapitalization? Ex- plain why in max 2 lines. iii. What is the cost of equity of the levered firm? Briefly discuss your answer (max 2 lines). iv. Compute the WACC of the levered firm. (c) In t = 2, the government increases the corporate tax rate to 20%. If the debt-equity ratio is still 0.5, compute the (after-tax) WACC. (d) Given the government's decision in t = 2, what should Gallo's optimal capital structure be