Kushlani Plc is considering changing its capital structure. Currently Kushlani has Rs. 10 million in debt at 8% and its stock price is Rs. 40 per share with 1 million shares outstanding. Kushlani is a zero growth firm and pays out all of its earnings as dividends. EBIT is Rs. 14.933 million and tax rate is 35%. Market risk premium is 4% and risk free rate is 6%. Kushlani is considering increasing its debt in capital structure to 30%, 40% or 50% at the interest rate of 8.25%, 8.5% and 9% respectively. Unlevered beta of Kushlani is 1.2.

a. What is Kushlanis levered beta? (02 Marks)

b. What are Kushlanis new beta, cost of equity and WACC if it has 30%, 40% and 50% debt? Determine the optimal capital structure of the Kushlani. (05 Marks)

c. Using a graph show the Cost of Equity of Kushlani at different level of debt and highlight the premium for business risk and financial risk. (03 Marks)