(a) MedikoBot is a company that makes robots that assist with surgeries. The company is currently unlevered and has a cost of equity of 11.5%. The company is planning to issue debt and buy back shares with the proceeds. The company believes it can obtain a bank loan at an interest rate of 8.2% per year. Its new leverage level (i.e., its debt-to-value ratio) will be 40%. The company operates in a perfect capital market, and in particular pays no taxes. What will be its new WACC, and its new cost of equity?
(b) AI-AI-O is a company that delivers AI-powered analytics to its clients. The company has a total market value of $6.42 million. It has perpetual debt (i.e., debt on which it pays interest but the principal never matures) of $1.5 million, at an interest rate of 6.0%. The firm's tax rate is 20%. You may assume taxes are the only imperfection in the capital markets. What is the value of the unlevered firm?
(c ) A company announces that it is going to issue new equity to investors. It plans to hold the amount raised from selling the new shares as cash while it seeks a positive NPV project. Do you expect the value of the company to rise, fall, or stay the same, and why?