Q2A: Consider the following capital structures:

A: 30% debt and 70% equity

B: 70% debt and 30% equity

C: 50% debt and 50% equity

Regardless of the composition, ke=30% and kd=15%. The effective tax rate is 40%

Calculate WACC for Capital Structure A; The WACC for B=______ and C=_______. What is

the optimal capital structure?

Q2B: Company A has a Net Income of $40m, EBIT of $40m and Total Assets of $120m. What is

its return on assets? Compare it with the optimal capital structure's WACCand determine

whether this company creates value for their shareholders?