Kris Corporation is a leading automobile manufacturer. The balance sheet of the company is as follows (in millions):

Assets		Liabilities
Fixed Assets	1700	Debt	1000
Current Assets	300	Equity	1000

The debt of Kris Corporation is in the form of long-term bonds with a coupon rate of 10%. The bonds are selling at 90% of face value at a yield of 11%. Kris currently has 20 million shares outstanding. The book value per share is $50, while the current market price is $90 per share. The stock currently has a beta of 1.25.

Kris is considering doing an equity-for-debt swap to change its capital structure. It plans to issue $200 million more of equity to retire $200 million of debt. This action is expected to lower the firm's yield to maturity by 1%.

The risk-free rate is 6% and the market risk premium is 5.5%. The corporate marginal tax rate is 50%. The company has no preferred stock.

1. Estimate the current cost of capital for Kris.

(4 marks)

2. Estimate the cost of capital after the equity-for-debt swap. From a cost of capital standpoint, would you like to stay with the current capital structure? Explain.

(8 marks)

3. Based on the business that Kris operates in, evaluate the indirect bankruptcy costs that may accrue to Kriss business. What role (if any) would the indirect bankruptcy costs play in Kriss capital structure decision?

(4 marks)

4. What kind of other factors would you consider when determining Kriss capital structure? Why?

(4 marks)