Exhibit 4. A firm wishes to recapitalize its position. Currently, its capital structure is such that it is comprised of 40% debt and 60% equity. Thus, the firm is already LEVERED. The firms current data is as follows:

EBIT $1,500,000 Cost of debt 9.00%

Capital $4,000,000 Cost of equity 11.50%

Taxes 20.00% Shares Outstanding 500,000

Stock price per share $19.72 Beta 1.50

EPS $2.17 Risk free rate 2.50%

Growth on dividends 3% Market risk premium 6.00%

Dividend policy: 75% earnings payout

The company plans to retire its current debt completely at the end of the year. Then it plans to issue a new round of debt, hopefully at a lower rate than what they are paying now. They plan to use all debt dollars to repurchase stock. They are currently considering the following debt schedule:

Amount borrowed Bond rating Cost of Debt

$400,000 AAA 4.00%

$800,000 AAA 5.00%

$1,200,000 AA 6.00%

$1,600,000 A 8.00%

$2,000,000 BBB 10.00%

$2,400,000 BB. 12.00%

$2,800,000 BB 13.00%

$3,200,000 B 14.00%

$3,600,000 B 15.00%

Refer to Exhibit 4. Considering the debt schedule that was given to the company, how much debt should the company take out? If it does, what will its new WACC and stock price be? (Caution: Highlighted information for growth rate and payout ratio will directly impact stock price calculations and you will need to adjust your formula accordingly.)