Problem $3(43$ marks$)$

Texas Inc. has an EBIT of $$450,000$ that it expects it will earn forever, and it pays all of

its earnings as dividends to shareholders $($i$.$e$.,$ no growth$).$ The firm has a corporate tax

rate of $40\%$ and has an un$-$levered beta of $\mathrm{.}90.$ The firm has $92,656$ common shares

issued and outstanding. In the market, you observe that Government T$-$bills are being

sold to yield $4\%$ and the S&P$/$TSX Composite Index is expected to yield $10\%.$ Assume a

world of taxes and a cost for the risk of default.

a$)$ Calculate the value of the firm. $(7$ marks$)$

b$)$ Calculate the WACC for the firm. $(4$ marks$)$

c$)$ What is the value of a share in the company and what is the EPS? $(4$ marks$)$

d$)$ What is the value of the firm if the firm issues $$600,000$ of bonds at par with a

coupon rate of $7\mathrm{.}5\%?$ The beta for the equity of the leveraged firm is $1\mathrm{.}02.(10$

marks$)$

e$)$ What is the value of the firm if the firm issues $$700,000$ of bonds at par with a

coupon rate of $8\mathrm{.}5\%?$ The beta for the equity of the leveraged firm is $1\mathrm{.}40.(10$

marks$)$

f$)$ What is the optimal level of debt, $$600,000$ or $$700,000?$ Explain. $(4$ marks$)$

g$)$ What is the WACC for the firm at the optimal level of debt? $(4$ marks$)$