Paul Rosenzweig is founder and CEO of OpenStart, an innovative software company. The company is all-equity financed, with 100 million shares outstanding. The shares are trading at a price of $ 1. Rosenzweig currently owns 10 million shares. There are two possible states in one year. Either the new version of their software is a hit, and the company will be worth $ 160 million, or it will be a disappointment, in which case the value of the company will drop to $ 75 million. The current risk free rate is 3.7 %. Rosenzweig is considering taking the company private by repurchasing the rest of the outstanding equity by issuing debt due in one year. Assume the debt is zero-coupon and will pay its face value in one year.

A. The Market Value of new debt should be 90 million as 90 Million shares are to be repurchased as the current value of the shares is $1.

B. The current value of $ 75 million is $ 72.32 by considering risk free rate of 3.7

C. To raise a total of $90 million after raising $72.32 million in risk free debt you would need to raise an additional 17.68 million, which equivalent to 63.87% of the levered equity

D. These payoffs are the same as if OpenStart issued a face value of $90 million in risky debt.

E. With the face value of $90 million and a market value of 129.29 million the yield is 43.66%

F. Without leverage the return on equity is 60% when high or -25% when low, for an expected return of 17.5% as the company is currently all equity. This is initial WACC.

G. What is OpenStarts debt and equity cost of capital after the transaction? Show that the WACC is unchanged by the new leverage. OpenStart's debt return is a. 43.66% b. -16.67 c. 17.51% d. 53.60% e. 13.5% in the good state, and a. 43.66% b. -16.67 c. 17.51% d. 53.60% e. 13.5% in the bad state, for an expected return of a. 43.66% b.-16.67 c. 17.51% d. 53.60% e. 13.5%. OpenStart's remaining equity is worth a. 30.71 b. 10.00 c. 15.36 million and has a payoff of a. 30.71 b. 10.00 c. 15.36 million or zero, or an expected payoff of a. 30.71 b. 10.00 c.15.36 million. This corresponds to an expected return of a. 43.66% b. -16.67 c. 17.51% d. 53.60% e. 13.5%. The WACC is therefore a. 43.66% b. -16.67 c. 17.51% d. 53.60% e. 13.5% just as in (f).

****bolded texts are possible answers given in the problem, need help answering the bolded in G***

***all answers for A-F were solved already***