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%

i. Given the above information, what is the value of the firm?(4 marks)

ii. Given the above information, what is the WACC of the firm? (2 marks)

iii. Additional research you have done has indicated the following information:

Prepare a short professional consulting report including a schedule an excel spreadsheet 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) (7 marks)

iv. What significant finding does your report indicate for your friend and what is your recommendation for the capital structure of the firm?

v. The company currently has 34,300 shares issued and outstanding. What is the market value of each share?

vi. You have decided to recommend a change in the capital for the firm. Assuming the markets are efficient and that you have recommended a change in the capital structure that will maximize the value of the firm and maximize the value of the shareholders wealth. What is the issue price or offer price for the shares?

vii. Provide proof that the issue price or offer price is a fair price for all shareholders.

State of Probability Expected Nature of State EBIT Boom Normal Recession 0.25 1,000,000 0.50 0.25 600,000 200,000