Hollis, Inc. has no debt outstanding and the cost of capital for the firm is 10%. It is considering adding debt to the capital structure. They aim for a capital structure of 10% debt, 90% equity at first. The borrowing rate is 4%.

-Assuming no taxes, what is Hollis cost of equity under the new capital structure? What is the weighted average cost of capital? What theory does this demonstrate?

-Assuming that the corporate tax rate for Hollis is 35%, calculate the cost of equity and the weighted average cost of capital under the new capital structure scenario. What theory does this demonstrate?

-What is the implication in parts a and b to firm value under different debt-to-equity ratios?