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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
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 F-Bill yield is 3%, corporate tax rate is 40%, and the market risk premium is 7%. (19 marks) a) What is the value of the unlevered Popstar provided that the unlevered beta is 1 ? (4 marks) b) What is the WACC of the firm in the no-leverage scenario presented in the table? (2 mark) c) 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 marks) d) As a financial analyst, what is your expert recommendation among the three scenarios Popstar is faced with? Why? (4 marks)
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