Question 3 (25 marks) a) Jimmy Corporation is an all-equity firm that has 40,000 outstanding shares. You own 6,000 shares, and you would like to sell all of your ownership (at market price) to other shareholders. The other shareholders have agreed to have the firm borrow $3 million to purchase all your shares. Calculate the total value of this firm with the consideration of Modigliani and Miller (MM) Proposition I without tax. (4 marks) b) Kitty Limited has a constant earnings before interest and tax (EBIT) of $30,000 each year. The firm has 200 units of outstanding bonds with a coupon rate of 5%, in which the face value is $1,000, and the bond is selling at par. Given the unlevered cost of capital is 10%, and the corporate tax rate is 30%, calculate the firm value of Kitty Limited with the consideration of Modigliani and Miller (MM) Proposition I with tax. (8 marks) c) George Corporation has a debt-to-equity ratio of 0.68 . The levered cost of equity is 15.54%, and the required return on assets is 11.7%. Calculate the cost of debt based on Modigliani and Miller (MM) Proposition II without tax. (4 marks) d) Jason Limited is an all-equity firm with a cost of capital of 15%. The firm would like to issue bonds in the coming year with a new capital structure which has (1- y%) of debt and y% of equity. Given that the corporate tax rate is 30%, calculate the value of y% (the percentage of equity in the new capital structure) by considering Modigliani and Miller (MM) Position II with tax if the cost of equity in the new capital structure is 20% and the pre-tax cost of debt is 10%. ( 8 marks) e) Indicate whether the following statement is true or false. No explanation is required "According to pecking order theory of capital structure, firm value increases with leverage, and the optimal capital structure is the one with maximal amount of debt." (1 mark)