You are the CFO of Livwell, an unlevered firm with constant EBIT of $4,000,000 per year in perpetuity. You are considering the use of some debt financing to repurchase shares. You have developed the following schedule based on the PV of bankruptcy costs of $10,000,000: Cost of Debt 1% 3% Value of Debt Probability of financial distress $1,000,000 0.00% 1,500,000 1.50% 2,500,000 3.00% 5,000,000 6.50% 10,000,000 15.50% 15,000,000 40.00% 18,000,000 65.00% The current cost of equity is 12%, and the tax rate is 40%. a) What is Livwell's market value and the WACC before any debt is taken on? (3 marks) b) According to M&M's case (world) II, what is Livwell's optimal level of debt? No calculation required (2 marks) c) What is the optimal capital structure when financial distress costs are included? (16 marks) d) Compute the WACC at the optimal capital structure determined in part (c). (7 marks) You are the CFO of Livwell, an unlevered firm with constant EBIT of $4,000,000 per year in perpetuity. You are considering the use of some debt financing to repurchase shares. You have developed the following schedule based on the PV of bankruptcy costs of $10,000,000: Cost of Debt 1% 3% Value of Debt Probability of financial distress $1,000,000 0.00% 1,500,000 1.50% 2,500,000 3.00% 5,000,000 6.50% 10,000,000 15.50% 15,000,000 40.00% 18,000,000 65.00% The current cost of equity is 12%, and the tax rate is 40%. a) What is Livwell's market value and the WACC before any debt is taken on? (3 marks) b) According to M&M's case (world) II, what is Livwell's optimal level of debt? No calculation required (2 marks) c) What is the optimal capital structure when financial distress costs are included? (16 marks) d) Compute the WACC at the optimal capital structure determined in part (c). (7 marks)