Fenerbahce Soccer Club has $15 million debt outstanding due next year and currently has $8 million cash. Fenerbahce has no other assets. Assume that Fenerbahce can hire a superstar soccer player Ronaldo for $8 million. Ronaldo can generate revenues of $20 million w/ probability 10% or revenues of $2 million w/ 90% probability next year. Do Fenerbahce shareholders hire Ronaldo? Do debtholders of Fenerbahce prefer hiring Ronaldo? Galatasaray Soccer Club has no debt and has $10 million. Will Galatasaray hire Ronaldo? Please show your work. (Assume that discount rate is zero).

Mr. Brown, CFO of Firm Crown, gives a briefing to the board of directors. He shows that the required rate of return to debt is 5% while the required rate of return on equity is 10 percent. He states As the required rate of return on debt is lower than the required rate of return on equity, an increase in the weight of debt in the capital structure through debt issuance will decrease the WACC of the company. State two reasons why his conclusion is not necessarily true even in the presence of tax benefits of debt