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 II: Assume tax rate is 35% but no default risk. Assume before tax cost of debt is 2.2%.

d) What is the WACC of this all-equity financed firm? What is the value of the firm? (2 marks)

e) What would be the firms value and overall cost of capital, if the firm uses $2,400,000 (market value) debt in generating its EBITs of $580,000? (4 marks)

f) Complete the following table. In M&M case II, what level of debt is optimal? (1mark)

Value of Firm		Value of Debt	Value of Equity		RD		RE		WACC
??		0	??		2.2%		??		??
4,422,291		600,000	3,822,291		2.2%		9.639%		8.525%
4,632,291		1,200,000	3,432,291		2.2%		10.484%		8.139%
4,842,291		1,800,000	3,042,291		2.2%		11.546%		7.786%
??		2,400,000	??		2.2%		??		??
5,262,291		3,000,000	2,262,291		2.2%		14.768%		7.164%
5,472,291		3,600,000	1,872,291		2.2%		17.386%		6.889%