Firms U and A are similar except that firm U is unlevered, while firm A is a levered and has 5% Debt of 20% in its total capital structure amount of OMR 1,000,000.

Assume that the corporate tax rate is 40%; net operating income is 20% of total fixed assets and the cost of equity of unlevered firm is 10%. Total fixed assets amount OMR 700,000.

As finance student, by following Modigliani-Miller Approach estimate the value of the unlevered firm (U) and levered firm (A) and also compute overall cost of capital of levered firm.

Suppose that if the firm A increases its debt amount to 50% of its total capital structure, then what would be the new equity value of levered firm A, and new cost of equity of levered firm A