Note that you are given the pre-tax cost of debt at different levels of financial leverage, but must calculate the after-tax cost of debt. Also, you will need to estimate the beta at various levels of financial leverage using the Hamada Model. From there you will need to use the CAPM to calculate the cost of equity at each level of financial leverage. Once you have done that, the value of the firm is just the discounted present value of the expected Free Cash Flows cash flow at the implied WACC. Note that we are assuming no growth in the FCFs, so the discounting is done with the regular perpetuity model.

1. What is the after tax cost of debt if the weight of debt (w_d) is .26?

2. What is your estimate of the firm's beta if the firm were to use 52.0 percent debt in its funding mix? (i.e. w_d = .520)

3. What is the cost of equity if the firm uses 19.5% debt in its funding mix?

4. What is your estimate of the firm's WACC if the firm uses 45.5% debt in its funding mix?

5. What is the value of the firm if the firm uses no debt at all? (Note that Free Cash Flow given in the problem is state in millions of dollars.)

6. Of the weights of debt given in the original problem, at which weight of debt (w_d) would the value of the firm be maximized?

7. If you were to graph the value of the firm's WACC as a function of the values of w_d given in the original data sheet, at which value of w_d would the resulting curve be at its lowest value?

8. If you were to graph the value of the firm as a function of the values of w_d given in the original data sheet, at which value of w_d would the resulting curve be at its highest value?

A B D E F G | K M. L 0.28 O N Mil. Shares FCF in mil. 48 Tax Rate 10 Pre-tax After-tax w. Value of Firm S&P Bond Rating AAA AA+ S&P500 10 yr. T-Note I'm 10.00% 3.47% rd 1.91% rs WACC B 1.0500 W, 1.000 0.935 0.870 AA 0.000 0.065 0.130 0.195 0.260 0.325 0.805 AA- A+ 0.740 0.675 0.610 A A A- 0.390 0.455 0.545 rd 2.65% 2.96% 3.25% 3.56% 3.75% 3.89% 4.01% 4.65% 5.25% 6.23% 7.22% 7.84% 9.12% 10.56% 12.62% 18.45% BBB+ BBB 0.520 0.480 BBB- 0.585 0.650 0.415 0.350 CCC+ 0.715 0.285 0.220 0.780 CCC - CC 0.155 0.845 0.910 C 0.090 0.025 0.975 D A B D E F G | K M. L 0.28 O N Mil. Shares FCF in mil. 48 Tax Rate 10 Pre-tax After-tax w. Value of Firm S&P Bond Rating AAA AA+ S&P500 10 yr. T-Note I'm 10.00% 3.47% rd 1.91% rs WACC B 1.0500 W, 1.000 0.935 0.870 AA 0.000 0.065 0.130 0.195 0.260 0.325 0.805 AA- A+ 0.740 0.675 0.610 A A A- 0.390 0.455 0.545 rd 2.65% 2.96% 3.25% 3.56% 3.75% 3.89% 4.01% 4.65% 5.25% 6.23% 7.22% 7.84% 9.12% 10.56% 12.62% 18.45% BBB+ BBB 0.520 0.480 BBB- 0.585 0.650 0.415 0.350 CCC+ 0.715 0.285 0.220 0.780 CCC - CC 0.155 0.845 0.910 C 0.090 0.025 0.975 D