Question 1 EasyDebt plc has a total market value of f250 million. The firm currently has f100 million of long-term debt, on which it pays interest at 10% per annum. The corporate tax rate is 40%. The average return on the market portfolio is 15%, while the risk-free interest rate is 5%. Suppose EasyDebt's equity beta is 1.20 at the current debt-equity ratio, and that the firm has a target debt level policy. Calculate the following: a. The firm's cost of equity. b. The firm's (after-tax) WACC. c. The value of the (hypothetical) unlevered firm. d. The value of the (hypothetical) unlevered firm calculated alternatively by applying the APV method using the unlevered cost of equity... Question 2 Suppose ALPHA is an all equity firm which will produce a stream of cash flow that is paid out fully as a dividend, di, d2, d3,..., at the end of each year (till infinity). ALPHA has value of V = fim. ALPHA now takes on long term debt structured as a perpetuity of E200,000 at 5% interest. So, annual repayments C satisfy C/0.05 = f200,000, which means that annual interest payment C = f10,000. The principal of $200,000 is paid out to equity holders. Assume that there is no corporate tax, or equivalently that the corporate tax rate is zero. a. Show the effects of the leveraged recapitalization on the (market value) balance sheet of the firm in two steps: (i) issuing debt, (ii) paying out the proceeds to equity holders. b. If the beta of assets is 0.8, the risk-free rate is 4% and the market risk premium is 8%, what is the cost of equity after the leveraged recapitalization? What is the cost of equity before the leveraged recapitalization? Question 3 Nike Corporation plans to start manufacturing its new basketball shoe called "Air-Square". The new project will be financed by a 60% debt-to-equity ratio, where debt and equity are measured in market values. At this debt-to-equity ratio, debt is risky and Nike estimates that the beta of debt will be equal to 0.30. Nike has launched similar products in the past and is convinced that the beta of equity for Air-Square for the hypothetical case of zero debt (i.e. the unlevered beta of equity) will be equal to 1.15. The annual risk-free interest rate equals 4% and the market gives a 12% average annual return. The corporate tax rate is equal to 35%. Assume that Nike pursues a target debt-to-equity ratio policy. a. Compute the Weighted Average Cost of Capital (WACC) for Air-Square