Question 4 Haggis Inc. is a restaurant chain specializing in Scottish dishes. Its common stock has a market value of $750 million and debt with a value of $250 million. The equity beta of Haggis is 1.25 and the debt beta is 0.25. The risk-free rate is 2% and the market risk premium is 8%. a) What is the WACC of Haggis in an environment without taxes? b) Haggis faces a marginal corporate income tax rate of 35%. What is the WACC of Haggis in an environment with taxes? How does the deductibility of interest expenses affect the costs of capital of Haggis? c) Haggis decides to repurchase $500 million of its equity and by issuing $500 million of new debt. This increase in leverage increases the equity beta from 1.25 to 2 and increases the debt beta from 0.25 to 0.6667. What is the WACC without taxes? d) What is the WACC with taxes after the change in capital structure described in question c? Assume the betas remain the same as the ones given in part c. How does the deductibility of interest affect the leverage choices of firms?