Aussie Ltd and Kiwi Ltd are identical in all aspects except for their capital structures. Aussie Ltd is 100% equity financed and has an unlevered cost of equity (k_u) of 17%. Its current before interest and after-tax cash earnings (Xo) are $190,000, which are expected to grow at a constant rate of 4% per year indefinitely. Kiwi Ltdhas $400,000 of debt in its capital structure and expects to maintain this level of debt permanently. Assume the corporate tax rate paid by both companies is 40% and the cost of debt (k_d) is 8% p.a.

1. Assume Miller and Modigliani (MM) perfect capital markets with no taxes.

1. What is the value of Kiwi Ltd?

2. What is the WACC for Kiwi Ltd?

2. Now consider a Miller and Modigliani (MM) perfect capital markets with corporate taxes world:

1. What is the value of the tax subsidy, and what is the value of Kiwi Ltd?

2. What is the value of equity and the WACC for Kiwi Ltd?