Question 8 30 pts More Yacht Inc. is a company that consists of two divisions: a boat division that builds and sells luxury yachts, and a cruise division that offers various vacation cruises in the Caribbeans. The boat division is expected to generate a perpetual level end-of-year free cash flow of $3.78 million. The cruise division is expected to generate a perpetual level end-of-year free cash flow of $8.00 million. More Yacht is not publicly traded. The CFO of More Yacht would like to determine the weighted average cost of capital for each of the company's two divisions. For this purpose, she has found a publicly traded company, Ships Ahoy, whose operations are similar to those of More Yacht's boat division, and another publicly traded company, Sea Sea Rider, whose operations are similar to those of More Yacht's cruise division. In addition to knowing that both firms borrow at the risk-free rate, she has access to the following information about these two firms. Ships Sea Sea Ahoy Rider Debt/equity (D/E) ratio Equity beta (BE) 0.00 0.75 1.80 1.45 Because she owns a significant fraction of More Yacht's equity, the CFO is also interested in knowing the value of the firm's equity under its optimal capital structure. She figures that the boat division's optimal debt capacity (D/V) is 25%, whereas that of the cruise division is 50%. She also thinks that, on its own, the boat division would borrow at a premium of 2% over the risk-free rate, whereas the cruise division would borrow at a premium of 1%. The corporate tax rate (which all three firms are subject to) is 40%. The risk-free rate is 5%, and the market risk premium is 5%. Assume that all the debt is perpetual, and that the only market imperfection comes from corporate taxes. Also, unless appropriate, you should not assume that the debt beta is zero when levering/unlevering. (15 points) Calculate the weighted average cost of capital of More Yacht's two divisionsunder the optimal capital structure. (8 points) Calculate the levered value of each division and the total levered value of thefirm under the optimal capital structure. (7 points) How much of the levered value of the firm comes from debt tax shields? Hint: Calculate the unlevered value of each division and the total unlevered value of the firm.