Handwritten or Typed answers please. No excel!! Please outline the appropriate finance formulas used and explanations throughout. Appreciate it.

Problem 2 (31 marks) Your best friend is in a senior position of the finance department of Teenie Tiny and you are having lunch together after a round at the golf course. The discussion gets around to the fact that Teenie Tiny will lose their tax-exempt status and your friend mentions that all the debt that the company needs will be financed using bonds with a 5 percent coupon. However, you remember that during a lecture at SMU, it was mentioned that as a company issues more and more debt, the risk for the bondholders will increase and bondholders will require coupon interest rates to increase as the amount of debt increases. You have prepared the following table to assist in answering these questions: Value of Debt RO Beta EBIT 800,000 05.0% | 1.392500 Tax 40% 250,000 5.5% 1.483015 Rate T- 3.0% 500,000 6.0% 1.542274 bill Rate TSX 11.0% 750,000 6.5% 1.607016 1,000,000 7.0% 1.678038 1,250,000 9.0% 1.756303 1,500,000 11.0% 1.842075 1,750,000 13.0% 1.939488 2,000,000 15.0% 2.047619 a) Calculate the required rate of return for the un- levered firm. (2 marks) b) Calculate the market value of the un-levered firm in proposition 1. (2 marks) c) Calculate the WACC for an un-levered firm in c) Calculate the WACC for an un-levered firm in proposition II. (1 mark) d. Using the information from the table, calculate the value of the firm (proposition I), cost of equity, and the WACC (proposition II) each level of debt. (16 marks) Debt Value of Value Cost ro Beta of the of WACC Firm Equity (re) 0 250,000 500,000 750,000 1,000,000 1,250,000 1,500,000 1,750,000 2,000,000 e) Calculate the present value of distress. (4 marks) Value of Debt PV of Distress 0 250,000 500,000 750,000 1,000,000 1,250,000 1,500,000 1,750,000 2,000,000 f) Graph (on 2 separate graphs) the information for proposition I and proposition II. (4 marks) g) Briefly explain the amount of debt the company should use as a levered company. (2 marks)