Popstar, a record producer, is considering a restructuring to issue debt for its upcoming expansion project. Currently, Popstar has an annual EBIT of $975,000 for the foreseeable future. The following table shows different combinations (scenarios) of debt issued, and corresponding distress costs. The T-Bill yield is 3%, corporate tax rate is 40%, and the market risk premium is 7%. Debt Cost of Debt PV of distress costs 0 0 - $2,750,000 6% $500,000 $4,500,000 7.5% $2000,000

1.What is the value of the unlevered Popstar provided that the unlevered beta is 1?

2.What is the WACC of the firm in the no-leverage scenario presented in the table?

3.What are the values of the levered firm corresponding to the second and third row of the table (i.e., Debt = $2,750,000 and Debt = $4,500,000)?

4.As a financial analyst, what is your expert recommendation among the three scenarios Popstar is faced with? Why?

5.Consider a fourth possibility where Popstar would issue $5m of debt currently trading at par with 15% coupon payments. If the equity beta of the levered company is 2.8, what is value of the firm?