Alias Industries is currently an all-equity firm. In the coming year the firm is forecasting annual EBIT level $580,000. The firm expects no growth in the EBITs as it will pay all the earnings in cash dividends to its shareholders. As a result, the EBIT level of $580,000 will remain constant forever. The asset beta of the firm has an estimated value of 1.25. The expected return on a Government of Canada treasury bill is 2.2%, and the return on the TSX composite index is 7.6%. The firm has 260,000 shares of common stock outstanding.

M&M Case I: no tax and no default risk. Assume cost of debt is 2.2%.

a) What is the WACC of this all-equity financed firm? What is the value of the firm? (3 marks)

b) What would be the firms value and overall cost of capital, if the firm uses $2,400,000 (market value) debt to generate its EBITs of $580,000? Show your work. (4 marks)

c) Complete the following table. In M&M case I, what level of debt is optimal? (3 marks)

Value of		Value of		Value of		RD		RE		WACC
Firm		Debt		Equity
??		0		??		2.2%		??		??
??		600,000		5,880,447		??		9.639%		??
??		1,200,000		5,280,447		??		10.484%		??
??		1,800,000		4,680,447		??		11.546%		??
??		2,400,000		??		??		??		??
??		3,000,000		3,480,447		??		14.768%		??
??		3,600,000		2,880,447		??		17.386%		??