ANSWER QUESTION 2

1. Maria & Co. expects $80,000 annual EBIT in perpetuity. The company is currently debt free but can borrow at 14%. Its cost of equity is 25% and the tax rate is 35%. a. What is the current value of the firm? b. What will be the value if the company borrows $50,000 to repurchase (retire) some of its own shares? Refer to Problem 1. a. What will be Maria's cost of equity after the change in its capital structure? b. What will be Maria's WACC? C. How will the change in the firm's capital structure affect the firm's financial risk? N 2