Suppose KMS Corporation will be worth either 300M or 180M depending on whether the economy is strong or weak in one year. Both states of the economy are equally likely. The current risk-free rate is 5% and the cost of equity if the company is 100% equity financed is 20%. Assume perfect world.

1. (3 points) What is the current value of KMS if it is all-equity financed?
2. (3 points) What is the (before-tax) cost of debt, r_d, if KMSs debt is $100M? Explain.
3. (10 points) What is the (before tax) cost of debt if KMS borrows $178M?
4. (4 points) What is the cost of equity if KMS borrows $178M? If you have not completed part c) you may assume that r_d = 9%.
5. (6 points) On the debt-to-value-ratio (as X) and Expected rate of return (as Y) plane draw graphs of r_wacc, r_E, and r_d. Be specific, indicate on the graph all important / pivotal points and values. Draw graphs precisely, indicating pivots or changes in slopes of the curves