Question #2: 1) Costello Construction Inc. has an unlevered cost of equity is 13.5% with a pre-tax cost of debt of 9%. Both the book and the market value of debt is $265,000. Earings before interest and taxes are $149.000 and the tax rate is 34%. What is Costello Construction's weighted average cost of capital? (Assume there is no cost of financial distress) 2) Texas Inc. has an EBIT of $450.000 that it expects it will earn forever, and it pays all of its eamings as dividends to shareholders (ie., no growth. The firm has a corporate tax rate of 40% and has an un-levered beta of 90. The firm has 92.656 common shares issued and outstanding. In the market, you observe that Government T-bills are being sold to yield 4% and the S&P/TSX Composite Index is expected to yield 10% Assume a world of taxes and a cost for the risk of default a) Calculate the value of the form by Calculate the WACC for the firm, c) What is the value of a share in the company and what is the EPS? What is the value of the firm the firm issues 600.000 of bonds at par with a coupon rate of 7.5%? The beta for the equity of the leveraged firm is 1.02 e) What is the value of the firm the firm issues $700.000 of bonds at par with a coupon rate of 8.5% The bota for the equity of the leveraged firm is 1.40. What is the optimal level of debt $600.000 or $700.000? Explain c) What is the WACC for the fimm at the optimal level of debt