You work for the capital division of Mesla, Inc. Your team is responsible with raising capital for

various projects and with analyzing the effect of capital structure decisions. Some of the tasks

that your team is currently working on are outlined below. Please use the provided excel

template to ourline your answer to each.

Currently, your firm has $$12,000,000$ of debt outstanding that is selling at par and has a

coupon rate of $8\%.$ The tax rate is $24\%.$ How much of a tax shield does this debt provide

every year? What is the present value of the tax shield, assuming that your company

maintains this level of debt in perperuiry?

Your firm has a debt$-$equity ratio of $.60.$ Your cost of equity is $11\%$ and your cost of debt

is $4\%.$ Elon Tusk, the CEO of Mesla, wants to increase the company's growth and is

therefore considering increasing the level of debt to reach a target capital stmeture with a

$\frac{50}{50}$ mix of debt and equity. What will happen to your fim's cost of equity if this

decision goes through? You are facing uncertainty about what the tax rates will be for the

near future, so your boss would like you to look at this in a situation without taxes first.

and then consider a situation where the tax rate is $24\%.$ Briefly discuss the effect of taxes.

The flow$-$to$-$equity approach has been used by the fim to value their capital budgeting

projects. The total investment cost at time $0$ is $$640,000.$ The company uses the flow$-$to$-$

equity approach because they maintain a target debt to equity value of $0\mathrm{.}5$ and they plan

to finance this project using the same debt to equity ratio. What is the relevant initial

investment cost to use in determining the value of the project?

Your firm is considering financing a project that cost $$1,000,000$ by raising $$500,000$ in

equity and $$500,000$ in debt with a $7\%$ interest rate for $8$ years. The NPV of the

unlevered project would be $-$$$50,000.$ Asme that the tax rate for your firm stays at $24\%.$

What is the value of the tax subsidy to d

the levered project?