Your friend is the financial manager at Fish Oils Inc. in Eastern Passage that is a major supplier of fish oil a source of omega 3. Your friend is desperate and has asked you to examine the capital structure of the firm and to make any necessary recommendations for the maximization of the value of the firm and for the maximization of shareholders wealth. Your friend has provided the following information on the firm:

Corporate tax rate 40%

Debt Outstanding $700,000 with a 12.0 percent coupon

Expected EBIT expected forever.

Companys Beta 1.75958

Your research has provided the following information:

T-bill rate 4% Return on the TSX 10%

1. Given the above information, what is the value of the firm?(4 marks)
2. Given the above information, what is the WACC of the firm? (2 marks)
3. Additional research you have done has indicated the following information:

Prepare a short consulting report for your friend that provides a schedule of the value of the firm and the WACC for the firm at the various levels of debt. In this report, include a graph of the value of the firm (proposition I) and the cost of capital for the firm (proposition II)

d. What significant finding does your report indicate for your friend and what is your recommendation for the capital structure of the firm? (2 marks)

State of Probability Nature of State Boom 0.25 Normal 0.50 Recession 0.25 Expected EBIT 1,000,000 600,000 200,000 Level of Debt 300,000 400,000 500,000 600,000 700,000 800,000 Interest Rate 7.00% 7.50% 9.00% 10.50% 12.00% 13.50% Beta 1.59870 1.63542 1.67433 1.71564 1.75958 1.80640