QUESTION TWO - CAPITAL STRUCTURE DECISION SHASHA Limited is an all-equity firm. Current equity investors require a 16 percent return. The company distributes all of its earnings to capital providers at the end of each year. SHASHA Limited estimates that its annual earnings before interest and taxes (EBIT) will be Ksh 4,200,000. These arnings will remain constant throughout the life of the firm. If the company raises debt capital, the proceeds will be used to retire equity capital. Corporate taxes on taxable profits is 30%. The situation provided below (a to d) are independent of each other. Required a. Compute the current value of the firm and its weighted average cost of capital b. SHASHA issued Ksh 9,000,000 of debt at an interest rate of 10 percent and uses the proceeds to retire part of equity. Compute the new value of the firm, cost of equity and weighted average of cost of capital c. SHASHA issued Ksh 12,000,000 of debt at an interest of 12%. The government introduced 8% and 10% withholding taxes on interest and dividend incomes. Compute the new value of firm, cost of equity and weighted average cost of capital. d. SHASHA issued Ksh 15,000,000 of debt at interest rate of 15%. The debt resulting to financial distress and agency costs of Ksh 4.5millions. explain whether it was worth to issue the debt