Question 2 (20 marks) A&I Corporation has 1,000 shares outstanding, now trading at $30 per share. The firm has estimated the required rate of return by shareholders at 15%. It has also a perpetual bond outstanding with a $20,000 market value at an interest rate of 10% Part A: Assume there is no corporate tax, and all the assumption for MM proposition is met (1) Calculate the value of the firm. (2 marks) (2) What is the company's weighted average cost of capital (WACC)? (3 marks) (3) What is the company's unlevered cost of equity capital? (3 marks) (4) What will the WACC of the company if it decides to change its capital structure to 50% equity and 50% debt? (2 marks) Part B: Now consider the marginal tax rate is 35% (tc = 35%), and all the assumption for MM proposition is met (1) What is the company's WACC now? (2 marks) (2) Calculate the present value of the firm's tax shield. (2 marks) (3) Show that WACC can be expressed as WACC = Ro[1 - (BID] where Ro is the unlevered cost of equity capital (6 marks)