Exercise 2: Capital Structure and Valuation II (20 pts, 5 by question) Firm F has a total value (debt and equity) of $80 millions. Debt is worth $30 millions. Firm F faces a corporate tax rate of 35%. Firm F expects next year's EBIT to be equal to $6 millions. Firm F wants to maintain a constant leverage (i.e. market value of debt/market value of equity) over time. In questions 1 to 3, cash-flows are expected to grow at a growth rate g = 3% rate from year 1 on. 1. What is the WACC of the firm? 2. Compute the value of the tax shield. Check that the value of the tax shield is different from B x Tc. 3. Find rb, and then rs. Check that your values are consistent with the value of the WACC found in question 1. 4. In question 4, we take g = 0. We assume that the cost of debt is 5%. Compute the largest value of debt B such that firm F has non-negative earnings. What is the value (or what are the values) such that the value of the tax shield is maximized (assume that carrying forward net operating losses is impossible)? Exercise 2: Capital Structure and Valuation II (20 pts, 5 by question) Firm F has a total value (debt and equity) of $80 millions. Debt is worth $30 millions. Firm F faces a corporate tax rate of 35%. Firm F expects next year's EBIT to be equal to $6 millions. Firm F wants to maintain a constant leverage (i.e. market value of debt/market value of equity) over time. In questions 1 to 3, cash-flows are expected to grow at a growth rate g = 3% rate from year 1 on. 1. What is the WACC of the firm? 2. Compute the value of the tax shield. Check that the value of the tax shield is different from B x Tc. 3. Find rb, and then rs. Check that your values are consistent with the value of the WACC found in question 1. 4. In question 4, we take g = 0. We assume that the cost of debt is 5%. Compute the largest value of debt B such that firm F has non-negative earnings. What is the value (or what are the values) such that the value of the tax shield is maximized (assume that carrying forward net operating losses is impossible)