1. You are CFO of Stews Donuts which has the following parameters. - A 33% target debt/equity ratio - The risk free rate is 4% - Beta of 2 - Market interest rate on debt of 8% - Tax rate of 25% - Expected market return is 10% 1. What is the companys WACC? Stew comes to see you one day to ask about increasing the debt/equity ratio to 80%. He believes adding debt will add to the value of the company.
   1. Why is Stew correct to a degree? Specifically, what reason explains why the value of the firm will be increased if the debt/equity ratio is increased? b. What do you need to explain to Stew about the limitations of his plan? Why will increased debt eventually not add to the value of the firm?