Consider a firm F with the following features:

• EBIT is 200 at time 1. Then, EBIT grows at a 1% annual rate (perpetuity).

• Regardless of firm F s leverage, firm F s probability of default is zero.

• Regardless of firm F s leverage, the covariance between firm F s stock return and the market return is 0.01.

• The corporate tax rate is 20%.

• The expected market return is 10%. The volatility of the market return is 15%. The risk-free rate is 2%. The so-called Weighted Average Cost of Capital (WACC) is defined as follows:

  WACC= S rS+ B (1Tc)rB= 1 rS+ L (1Tc)rB, S+B S+B 1+L 1+L

  where B is the firms debt, S is the firms equity, L = BS is the firms leverage, rS is the firms cost of equity, rB is the firms cost of debt, and Tc is the firms corporate tax rate.

(i) (2 points) What is todays value of firm F s debt (BF )?

(j) (2 points) What is todays value of firm F s equity (SF )?

(k) (2 points) Provide a general formula/expression for the Weighted Average Cost of Capital of firm F (WACC)? Hint: the formula should depend on the corporate tax rate, Tc, and the risk-free rate, rf, only.