Following is the information regarding the capital structure and profit performance of a company:

Net Operating Profit	$80,000
Market Value of Debt	$300,000
Cost of Debt	9%
Cost of Equity	13.25%
Number of Outstanding Shares	2,500

Required:

Using the Net Income approach to Capital Structure, show mathematically that the more the debt content used in the firms financing mix, the more will be the market value of the firm and the market price of its shares, and the lesser will be its overall cost of capital. Compute the market value of the firm, the market price of shares and the overall cost of capital for the following three scenarios:

1. The current situation
2. By increasing the amount of debt-financing
3. By reducing the debt-financing from the current level

Course: Finance