Q2. EBIT of a firm is equal to $880,000. Total Assets are $4m. It currently has no debt it is an all equity firm and its 200,000 shares outstanding sell at a price of $20 per share, which is also the book value. The firm's federal-plus-state tax rate is 40%. The risk-free rate, rRF, is 6% and the market risk premium, MRP, is 7%. The unlevered beta, bU, is 1.2. WACC is 13.2%. If the firm was recapitalized, debt would be issued and the borrowed funds would be used to repurchase stock. You were able to obtain the following estimates of the cost of debt at different debt levels Amount D/A D/E Borrowed Ratio Ratio rd 500,000 0.125 0.1429 7.00% 1,000,000 0.25 0.3333 8.50% 1,500,000 0.375 0.6 11.50% 2,000,000 0.5 1 13.00% (1) Assume that shares could be repurchased at the current market price of $20 per share. How many shares would remain after recapitalization under each scenario? (2) What is the optimal level capital structure? Fill in the table and indicate the optimal capital level. Amount Share Shares Borrowed Repurchased Outstanding BL rs WACC 500000 1000000 1500000 2000000