Firm F has a total value (debt and equity) of $80 millions. Debt is worth $30 millions. Firm F faces a corporate tax rate of 35%. Firm F expects next year's EBIT to be equal to $6 millions. Firm F wants to maintain a constant leverage (i.e. market value of debt/market value of equity) over time.

In questions 1 to 3, cash-flows are expected to grow at a growth rate g = 3% rate from year 1 on.

1. What is the WACC of the firm?

2. Compute the value of the tax shield. Check that the value of the tax shield is different from B TC.

3. Find rB, and then rS. Check that your values are consistent with the value of the WACC found in question 1.

4. In question 4, we take g = 0. We assume that the cost of debt is 5%. Compute the largest value of debt B such that firm F has non-negative earnings. What is the value (or what are the values) such that the value of the tax shield is maximized (assume that carrying forward net operating losses is impossible)?