Suppose that a TV manufacturing company is currently financed with 20% debt and 80% equity (at market values). The required return on equity is 15%, and the required return on debt is 5%. For all parts of this question, assume that the Modigliani-Miller theorem holds (i.e., there are no frictions such as taxes, costs of financial distress, asymmetric information, etc.).

Find the WACC given the above information.

Then find the WACC assuming that the capital structure changed to 40% debt and 60% equity and the cost of debt rose from 5% to 6%. What is the company?s weighted-average cost of capital after the debt issuance, given that the cost of debt has risen to 6%? What is the required return on the company?s equity?

Please show all work.

Value @ the beginning- ie. Initial investment= 3.2+4.8 8000000 Sale Value @ the end of 35 yeas-ie.Salvage value = 3.2+ 10% of 4.8 3680000 Depreciable value of the asset(8000000 3680000) 4320000 Annual depreciation = 4320000/35 yrs.= 123428.5714 a) Annual expenses for 30 units Annual operating maintenance Annual property taxes and insurance Annual depreciation expenses Total annual expenses/outflow 850000 480000 (6%*8000000) 123429 1453429 This amount should be spread over 88% units due to 12% vacancy rate Total annual expenses/outflow to be borne by the occupied units ie. 88% 1453429 Monthly leasing cost is an annuity (PMT) having values PV = 1453429 ; i= 15%p.a. ie.15/12=1.25% p.m. ;n= 12 periods Substituting the values in the formula , PV= PMT(1-(1+i)^-n)/i ie. 1453429 =PMT( 1-(1+0.0125)^-12)/0.0125 ie.$ 131184 for 88% of 30 units ie.26.4 units Monthly leasing cost for 1 unit= 146926 /26.4 = $ 4969.09 b) Total annual expenses/outflow as above 1453429 This amount should be spread over 95% units due to 5% vacancy rate Total annual expenses/outflow to be borne by the occupied units ie. 95% 1453429 Substituting the values in the formula , PV= PMT(1-(1+i)^-n)/i 1453429= PMT(1-(1+0.0125)^-12) / 0.0125 ie. $ 131184 for 95% of 30 units ie.28.5 units Monthly leasing cost for 1 unit= 131184 /28.5 = $ 4602.95 Combining 2 units into 1 does not seem to be a good decision as it fetches less per- unit lease rentals