The firm you have been assigned is Chilpotle Mexican Grill. It has zero debt in its capital structure as of January 2020. a.Find the unlevered Beta. Explain how you obtained this and your reasoning-this should be able to be explained in one sentence.

b.The objective of this problem is to show, how your firm could maximize its firm value by increasing its financial leverage. You will need to calculate your firms WACC under different financial leverage scenarios using actual market information to determine your firms costs of debt and equity as financial leverage increases.

c.What does a given interest coverage ratio tell us about the firm?

d.What is the pattern between interest coverage ratios and bond ratings as observed above? Why?

e.What does the spread indicate? Explain. You can obtain an estimate of the risk free rate using the following link: https://www.treasury.gov/resource-center/data-chart-center/interest-rates/Pages/TextView.aspx?data=yield

See the description in the paper Using Microsoft Corporation to Demonstrate the Optimal Capital Structure Trade-off Theory on the bottom of page 31 and top of page 32 to select your rate.

f.Be sure to describe how you obtained your pretax cost of debt, referencing the data you used and your use of the table above with bond ratings. Create a table for your firm like Table 1 where you calculate the pretax cost of debt for various bond ratings.

g.To calculate the cost of equity it is assumed that you will use CAPM. In the first paragraph of the same paper on the top of page 32 it tells you how to calculate the proxy for the expected return on the market to be used in calculation of your market risk premium.

h.Create a table like the one on page 32 (Table 3) where you calculate you Cost of equity for different bond ratings. Describe in particular how you obtained your Beta for a AAA rating (show the steps-I will not be checking excel spreadsheet formulas). So, you are coming up with re-levered Betas.

i.By now you have obtained both your pretax cost of debt and cost of equity.

In order to calculate the weighted average cost of capital you will need to calculate the capital structure weights in market value terms. Your objective is to create a table like Table 4 in the paper.

Recall, as noted in class, TD+TE = total debt plus total equity Wd= capital structure weight for debt Ws = capital structure weight for equity Kd = pre tax cost of debt Ks pre tax cost of equity For simplicity lets assume the corporate tax rate = 35% Show the calculation explicitly (written out) for your WACC for a AAA bond. It is ok to use a spreadsheet table pasted into your WORD document for the rest of your calculations.

What pattern do you observe in your table for the pretax cost of debt? Explain why this is. What pattern do you observe in your table for the cost of equity? Explain why this is.

What pattern do you observe in the weighted average cost of capital for your firm? Explain why this is.

According to your table what is optimal D/V? In the last part of the analysis you will come up with the value of your firm for various debt ratios (a table like Table 5). Pay attention to the last paragraph on page 33, where the authors describe how they came up with the free cash flow for Microsoft with zero debt. What are the authors assuming by using this calculation? According to your last table, what is the optimal D/V? Why is it optimal? Describe how this relates to The Modigliani Miller Theorem of Optimal Capital Structure?