Please provide solutions for the following two questions.

Q1) Quant Corp. is currently unlevered. The firm has $960,000 in before-tax earnings and

the unlevered asset beta is .8. The risk-free rate is 4% and the market risk premium is

10%.

a. Find the value of the unlevered firm.

b. The firm plans to issue $4,000,000 in debt to repurchase stock. The perpetual bonds

have an 8% return. The tax rate is 25%. The present value of financial distress costs is

$200,000. The present value of agency costs is $375,000. Use the trade-off theory to

estimate the value of the levered firm.

Q2) Cranium Inc is about to launch a new product. Depending on the success of the new

product, there are three possible outcomes for value next year: $210 million, $150

million or $60 million. These outcomes are all equally likely, and this risk is diversifiable.

Suppose the risk-free interest rate is 5%. (Ignore all other market imperfections, such as

taxes.). Cranium has $120 million in debt due next year.

a. What is Cranium 's total value with leverage?

b. Now suppose that in the event of default, 30% of the value of Cranium's assets will be lost to bankruptcy costs. What is Brain's total value with leverage and distress costs?