Bahrain Hotels Company B.S.C. has an expected EBIT of $ 17 million in perpetuity and tax rate = 25%. The Debt = $220 million; The Cost of debt = 8.25 %; Unlevered cost of capital = 14.25 %. Equity = $140 million. Using Modigliani and Miller approach (Case (II), Proposition (II) with taxes), find

1. The cost of equity (Re) and the cost of capital (Ra)?

2. If the firm keep increasing its financial leverage, explain what will happen to: (3 Marks)
   • the firm value,
   • the firm cashflow,
   • and the firm cost of capital.

Please answer all of the above,