1. A firm is solely financed by equity with market value of $50,000 and cost of equity of 10%. It wishes to raise another $50,000 via corporate bonds with cost of debt of 5% and keep it as cash. Hold investment policies fixed.

   1. In a MM world without taxes,

      1. What would the firm value be after debt issuance in a? Firm Value = Equity Value + Debt Value Cash.

      2. What would be the cost of equity after debt is raised?

      3. What would be the WACC after debt is raised?

   2. In a MM world with taxes of 40%,

      1. What would be the cost of equity after debt is raised?

      2. What would be the additional value created by debt?

      3. What would be the WACC after debt is raised?