Nielson Motors (NM) has no debt. Its assets will be worth $600 million in one year if the economy is strong, but only $300 million if the economy is weak. Both events are equally likely. NM is currently all-equity financed. Equity cost of capital of NM is 12.5%. The risk free rate is 6%. Assume there are no taxes, financial distress or agency costs, etc.

(3 points) What is currently the value of the company?

(4 points) What is the maximum amount of the risk free-debt that the company can borrow today (t=0)? What is be the corresponding value of the weight of debt? Explain, show your calculations

(8 points) On the weight-of-debt (X-axis) cost of capital (Y-axis) plane draw the graphs of the asset return, cost of equity and cost of debt. On the graph label all important points and indicate all important values. Label the axes.

(6 points) Now assume that the corporate tax rate is 40%. On the weight-of-debt (X-axis) cost of capital (Y-axis) plane draw the graphs of the weighted average cost of capital, cost of equity and the after-tax cost of debt. On the graph label all important points and indicate all important values. Label the axes.