Problem #5 (25 marks): Greenwood Groceries is an unlevered firm with constant EBIT of $6,000,000 per year in perpetuity. You are considering the use of some debt financing to repurchase shares. You have developed the following schedule based on the PV of bankruptcy costs of $18,000,000: Value of Debt $2,000,000 4,000,000 6,000,000 9,000,000 12,000,000 15,000,000 Probability of financial distress 0.00% 2.00% 4.00% 10.00% 20.00% 35.00% Cost of Debt 2% 4% 5% 6% 8% 12% The current cost of equity is 15%, and the tax rate is 40%. a) What is Greenwood's market value and the WACC before any debt is taken on? (3 marks) b) According to M&M's case (world) II, what is Greenwood's optimal level of debt? No calculation required (2 marks) c) Calculate the value of the company at each level of debt. What is the optimal capital structure when financial distress costs are included? (13 marks) d) Compute the WACC at the optimal capital structure determined in part (c). (7 marks) Problem #5 (25 marks): Greenwood Groceries is an unlevered firm with constant EBIT of $6,000,000 per year in perpetuity. You are considering the use of some debt financing to repurchase shares. You have developed the following schedule based on the PV of bankruptcy costs of $18,000,000: Value of Debt $2,000,000 4,000,000 6,000,000 9,000,000 12,000,000 15,000,000 Probability of financial distress 0.00% 2.00% 4.00% 10.00% 20.00% 35.00% Cost of Debt 2% 4% 5% 6% 8% 12% The current cost of equity is 15%, and the tax rate is 40%. a) What is Greenwood's market value and the WACC before any debt is taken on? (3 marks) b) According to M&M's case (world) II, what is Greenwood's optimal level of debt? No calculation required (2 marks) c) Calculate the value of the company at each level of debt. What is the optimal capital structure when financial distress costs are included? (13 marks) d) Compute the WACC at the optimal capital structure determined in part (c). (7 marks)