Problem 6 (10 Marks) Assume you are in a Modigliani Miller world. AB Corporation is unlevered and is valued at $640,000. AB is currently deciding whether including debt in their capital structure would increase AB's value. Under consideration is issuing $300,000 in new debt with an 8% interest rate, AB would repurchase $300,000 of stock with the proceeds of the debt issue. There are currently 32,000 shares outstanding and their effective tax rate is zero. a. What will the firm value be after the change? (1 mark) b. What will the share price be and how many shares will be outstanding after the change? (3 marks) Questions and below are independent from the above questions Now assume you are in a Modigliani Miller world with corporate taxes added. CD Corp. is all equity financed with 5,000 shares outstanding worth 57 each. Its onlevered cost fequity is 12%. CD is planning on issuing $10,000 of new perpetual debt at the 896 market rate of interest. The tax rate is 25% c. What is the market value of the firm's equity after they make the debt for equity exchange? (3 marks) (Questions c. and d. below are independent from the above questions.) Now assume you are in a Modigliani Miller world with corporate taxes added. CD Corp. is all equity financed with 5,000 shares outstanding worth $7 each. Its unlevered cost if equity is 12%. CD is planning on issuing $10,000 of new perpetual debt at the 8% market rate of interest. The tax rate is 25%. c. What is the market value of the firm's equity after they make the debt for equity exchange? (3 marks) d. What is CD's WACC if it takes on the debt? (3 marks) DOLL