Intelligent Farm Machineries, Inc. (NYSE: IFM) has a total market value of $100 million, consisting of $50 million of common equity and $50 million of 10% perpetual bonds now selling at par, i.e., YTM = 10%. IFMs EBIT is $10 million, and its tax rate is 20%. The company can change its capital structure by either increasing its debt to 60% (based on market value) or decreasing it to 40%. If it decides to increase its use of financial leverage, it must call its old bonds and issue new ones with a 12% coupon. If it decides to decrease its leverage, it will call its old bonds and replace them with new 8% coupon bonds. The firm will sell or repurchase stock at the new equilibrium price to complete the capital structure change. The firm pays out all earnings as dividends; hence its stock is a zero-growth stock. Its current cost of equity, r_s, is 14%. If it increases leverage, r_s will be 16%. If it decreases leverage, r_s will be 10%. Answer the following questions based on the assumptions: 1. Assume that the firm can sell new bonds at par regardless of its leverage ratios. 2. No required investment in capital is needed. Hence, FCF = NOPAT = EBIT (1 T). 3. Assume that the constant growth valuation formula with the growth rate = 0 is appropriate and the value of nonoperating assets is zero.

a. What is the firms WACC and total corporate value under the current capital structure?

(b) What is the firms WACC and total corporate value under the 60% debt ratio?

(c) What is the firms WACC and total corporate value under the 40% debt ratio?