You know from your MBA finance course that leverage can add value to your firm, so you consider

changing your capital structure. The banker gives you interest rate quotes for the following capital

structures:

wd $12\mathrm{.}5\%25\%37\mathrm{.}5\%50\%$

rd $5\mathrm{.}00\%7\mathrm{.}00\%10\mathrm{.}00\%12\mathrm{.}00\%$

b$.$ Assuming you repurchase shares of stock with the money raised from the debt issuance, for

each capital structure, calculate the new cost of equity, WACC, value of operations, and the

amount of debt issued. What is the optimal capital structure for your boutique, and why?

c$.$ For the optimal capital structure, calculate the number of shares to be repurchased, the new

value of equity, and the new price per share.

d$.$ Suppose the tax rate on business income is lowered from $40\%$ to $21\%.$ What is your new

optimal capital structure? Why does a lower tax rate have this effect on the use of debt?