ABC Ltd. currently has no debt, and it has 2 million outstanding shares in the market, each share selling for $15. The company's next year dividend is expected to be $2.35 and future dividends are expected to grow at a constant rate of 4%. 

What are ABC's total market value and its cost of capital?

 

Based on part  the management of ABC Ltd. is considering a capital restructuring to repurchase some shares by issuing 45,000 deep discount bonds (zero coupon) that will mature in 10 years. Similar bonds in the market are selling for 56% of face value. Face value is stated at $1000. Tax rate is 30%. What are ABC's new total market value, cost of equity and Weighted Average Cost of Capital (WACC) after introducing debt?

 

c) Clearly explain and graphically the theory of capital structure with taxes.