A senior member of the accounting staff is concerned the firm is overly aggressive in its use of debt funding. Suppose the use of debt funding could jeopardize the well-being of the firm. Using the data below, complete the capital structure/valuation table to illustrate the potential benefits and risks of using debt capital. Discuss your results. Be sure to address how the use of debt impacts the cost of equity, the overall cost of funding for the firm (WACC), and the value of the firm. You should finish your discussion with how the issue is relevant to managements job of creating value.

Data:

EBIT = $50,000,000

Growth, g =0

Tax rate = 25%

Beta (unlevered) = 1.0

Risk free rate = 5%

Market risk Premium = 6%

Beta = Bunlevered[1+(1-T)(D/S)]

Wdebt	Rdebt	Wequity	Beta	Requity	WACC	Value
0%	0%
20%	8.0%
30%	8.5%
40%	10%