Currently a firm has no debt, and an unlevered beta of 0.8737. The firm is considering changing their capital structure to a debt-to-equity ratio of 0.50-to-1.

Other pertinent details are as follows:

Current Tax Rate is 35%

The firms debt would be risk-free, with an interest rate of 2%

Return on the equity market is 8%

The firm expects to earn a constant EBIT of $30 Million into perpetuity

A. Calculate the firms levered beta given their new capital structure. Explain briefly why this beta is higher, lower or the same as the unlevered beta.

B. Calculate the firms cost of equity given their new capital structure.

C. Calculate the firms unlevered WACC, and their WACC under the new capital structure. Explain briefly why this WACC is higher, lower or the same as the unlevered WACC.

D. What is the value of the firm with no debt, and the value of the firm under the new capital structure?