ABC company has the following expected cash flows for three scenarios that could occur:

RecessionExpectedExpansion

(prob. = .2)(prob. = .5) (prob. =.3)

EBIT $10,000 $20,000$30,000

MV Assets ______

(a) Complete the table above if the company is 100% equity financed, it pays taxes at 30%, the non-levered return on equity is expected to be 12%, the constant growth rate (g) is 5%, and overall firm value is calculated based on the expected cash flows

(b) If the company wants to recapitalize (debt for equity swap) to save on taxes, what is the most debt the company can add (at a 6% rate) so that it will never go bankrupt under the above scenarios? (Assume the company goes bankrupty if EBIT < Interest owed)

(c) Calculate the WACC for the unlevered case and for the result in part (b).

(d) What is the market value of the assets if the firm chooses the debt level in part (b)? [Note: calculate the same way as part (a) but using the new WACC for the discount rate]

(e) If $200,000 in bonds are issued, what is the probability of bankruptcy over a three year period? (Note: you can assume each year is an independent draw from the above distribution)