KF, an all-equity firm, forecasts yearly after-tax cash flows of $20 million in perpetuity. The

firms value is currently $160 million. KF faces a 40% corporate tax rate.

KF is considering issuing $60 million of perpetual debt and repurchasing $60 million of its

shares using the debt proceeds (i.e., debt increases by $60 million, equity decreases by $60

million, excluding tax effects). The interest rate on the debt will be 8%.

a) (3 pts.) What is KFs cost of unlevered capital (rA) before the debt issuance?

b) (3 pts.) Use the APV method to calculate KFs value after the debt issuance. What are

the values of the firms equity and debt after the debt issuance?

c) (3 pts.) Calculate the new cost on equity (rE) and weighted average cost of capital

(rWACC) after the debt issuance?

d) (3 pts.) Use the WACC method to calculate KFs value after the debt issuance. e) (3 pts.) Assume KF is considering investing in a project with a mix of debt and equity different from the firms current capital structure. Discuss whether the WACC method or the APV method will be more appropriate to value the new project.