1. Use the following information to answer the questions.

Case I: Capital structure (no corporate tax)Case II: Capital structure (corporate tax)

Debt-to-firm value (D/V): 0%

Cost of equity: 10%

Cost of debt: 6%

Debt: $ 0 million

EBIT: $40 million

Tax rate: 50%

Unlevered cost of capital: 10%

Case I, when the debt-to-firm value (D/V) increases from 0% to 50%,

i)Figure out the new cost of equity.

ii)Figure out the old WACC with zero debt. Figure out the new WACC with debt of 50%.

Case II, when the debt increases from $0 to $60mil.,

i)Figure out the levered firms value.

ii)Figure out the optimal capital structure. In other words, does the capital structure affect the WACC?