Question $2.$ Popstar, a record producer, is considering a restructuring to issue debt for its

upcoming expansion project. Currently, Popstar has an annual EBIT of $$975,000$ for the

foreseeable future. The following table shows different combinations $($scenarios$)$ of debt issued,

and corresponding distress costs. The T$-$Bill yield is $3\%,$ corporate tax rate is $40\%,$ and the

market risk premium is $7\%.(19$ marks$)$

a$)$ What is the value of the unlevered Popstar provided that the unlevered beta is $1?(4$

marks$)$

b$)$ What is the WACC of the firm in the no$-$leverage scenario presented in the table? $(2$

mark$)$

c$)$ What are the values of the levered firm corresponding to the second and third row of the

table $($i$.$e$.,$ Debt $=$$$2,750,000$ and Debt $=$$$4,500,000?(4$ marks$)$

d$)$ As a financial analyst, what is your expert recommendation among the three scenarios

Popstar is faced with? Why? $(4$ marks$)$

e$)$ Consider a fourth possibility where Popstar would issue $$5m$ of debt currently trading at

par with $15\%$ coupon payments. If the equity beta of the levered company is $2\mathrm{.}8,$ what is

value of the firm? $(5$ marks$)$