Biancas Barbershops Limited (BBL) is an all-equity firm with an EBIT of $950,000. EBIT is expected to remain at this level forever. The firm pays all its earnings as dividends to shareholders (ie., no growth), has a corporate tax rate of 40%, an un-levered beta of 1.24, and 845,000 common shares issued and outstanding. In the market, you observe that Government of Canada T-bills are being sold to yield 1% and the S&P/TSX Composite Index is expected to yield 9.5%. Assuming a world of taxes and a cost for the risk of default,

1. Calculate the value of the firm. (2 marks)
2. Calculate the WACC for the firm. (1 mark)
3. What is the value (price) of a share in the company and what is the EPS? (2 marks)
4. What is the value of the firm if the firm issues $1,000,000 of bonds at a coupon rate of 4.5%? The beta for the equity of the leveraged firm is 1.32. (5 marks)
5. What is the WACC for the firm with its new capital structure? (2 marks)
6. What is the value of the firm if the firm issues $2,000,000 of bonds at a coupon rate of 6%? The beta for the equity of the leveraged firm is 1.62. (5 marks)
7. What is the WACC for the firm with its new capital structure? (2 marks)
8. Based on your calculations above, what is the optimal debt level? Explain briefly. (2 marks)