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3. Suppose the corporate tax rate is 40%. Consider a firm that earns $1,000 before interest and taxes each year with no risk. The firm's capital expenditures equal its depreciation expenses each year, and it will have no changes to its net working capital. The risk-free interest rate is 5%. (a) [10 points] Suppose the firm has no debt and pays out its net income as a dividend each year. What is the value of the firm's equity? (b) [10 points] Suppose instead that the firm makes interest payments of $500 per year. What is the value of equity? What is the value of debt? (c) [10 points] What is the difference between the total value of the firm with leverage and without leverage? (d) [10 points] The difference in part (c) is equal to what percentage of the value of the debt? 1. [10 points] A firm has a target debt-to-equity ratio of one. Its cost of equity equals 10 percent, the cost of debt is 6 percent, and the tax rate is 40 percent. What is the WACC? 2. [20 points] Rumolt Motors has 30 million shares outstanding with a price of $15 per share. In addition. Rumolt has issued bonds with a total current market value of $150 million. Suppose Rumolt's equity cost of capital is 10%, and that its debt cost of capital is 5%. If Rumolt's corporate tax rate is 35%, what is its weighted average cost of capital? 3. Suppose the corporate tax rate is 40%. Consider a firm that earns $1,000 before interest and taxes each year with no risk. The firm's capital expenditures equal its depreciation expenses each year, and it will have no changes to its net working capital. The risk-free interest rate is 5%. (a) [10 points] Suppose the firm has no debt and pays out its bet incoune as a dividend each year. What is the value of the firm's equity? (b) [10 points] Suppoes instead that the firm makes interest payments of $500 per year. What is the value of equity? What is the value of debt? (c) [10 points) What is the differenee between the total value of the firm with leverage and without leverage? (d) [10 points] The difference in part (c) is equal to what percentage of the value of the debt? 1 4. [30 points] An analyst gathers the following information for Firm A and Firm B. The analyst finds the CAPM betas reported in Bloomberg to be noisy and would like to reconstruct equity betas for the firms from the industry unlevered beta. Use the information below to compute the industry unlevered beta and the appropriate equity beta for each company for use in the WACC. Assume that the debt beta for both firms equals zero. Also, assume that there are no corporate taxes. - Firm A: CAPM beta =0.7; debt-to-equity ratio =0.4 - Firm B: CAPM beta = 1.2; debt-to-equity ratio =2