The firm is currently debt-free. Suppose that the cost of equity is 12%, the market beta is 1.2, and tax rate is 20%.

(a)What is current firm's value? WACC?

(b)The firm plans to do capital restructuring, so that the market value of this debt is 70% of the firm's levered value. What will be the value of the firm then? Ignore any default issues.

(c)Compute equity beta and WACC after this capital restructuring.

(d)So far we have ignored bankruptcy concerns. Assume now that defaults are possible and they are costly for bondholders. If the firm does the same capital restructuring (so that the value of debt is 70% of its levered value), do you expect its new WACC to be higher or lower than the one you found in part c? What about the firm value (compare it to part b)? In this part, you do not need to compute anything, just a brief explanation will be sufficient.