Question 1 Drexler & Fraser Corporation (DFC) and Fazilah & Rania Limited (FRL) are identical firms in all respects except for their capital structure. DFC is all equity financed with $10,000,000 in stock. FRL uses both stock and perpetual debt. Its stock is worth $6,000,000 and the interest rate on its debt is 10%. Both firms expect EBIT to be $2,000,000. Ignore taxes. a. Gloria Kok owns $300,000 worth of FRL's stock. What rate of return is she expecting? b. Show how she could generate exactly the same cash flows and the rate of return by investing in DFC and using homemade leverage. c. What is the cost of equity for DFC? for FRL? d. What is the WACC for DFC? For FRL? What is your conclusion? Question 2 Jeffrey Hui & Nick Simos Manufacturing (JHNSM) has an expected EBIT of $331,330 in perpetuity, a tax rate of 40%, and debt/equity ratio of 0.70. The firm has $700,000 in outstanding debt at an interest rate of 11%, and its WACC is 11.694%. a. What is the value of the levered firm according to M&M Proposition I with taxes? What is the value of the unlevered firm? b. Should JHNSM change its debt/equity ratio if the goal is to maximize the value of the firm? Explain.