A firm can get $$1,000,000$ in exchange of $25\%$ of its equity. After investing the amount raised in the firm,

the firm expects to generate $$300,000$ in FCF next year, which is expected to grow at $4\%$ in perpetuity

after that.

a$)$ Calculate the cost of capital to the firm. Ignore corporate taxes.

b$)$ Rather than issuing equity, the firm can raise $$1,000,000$ by issuing a risk$-$free perpetual bond at

$3\%.$ Calculate the cost of capital to the firm. Ignore taxes.

c$)$ Calculate the cost of capital of the firm in a$)$ and b$)$ if corporate taxes are $20\%.$ Please still assume

that that like in a$)$ the firm needs to give $25\%$ of its equity to raise the $$1,000,000$ and like in b$)$

the firm can issue $$1,000,000$ risk$-$free debt at $3\%.$

d$)$ Suppose that having debt creates financial distress costs so that the firm$$s cash$-$flows are reduced

by $2\%$ each year if $$1,000,000$ of debt is issued. $($Other than the financial distress costs, assume

that no direct bankruptcy costs are created by the debt.$)$ Calculate the cost of capital of the firm

if debt is issued to finance the investment.

e$)$ Should the firm finance the $$1,000,000$ investment with equity or debt:

a$.$ If the corporate tax rate is $20\%?$

b$.$ If there is no corporate taxes?

f$)$ Suppose that Mr$.$ Wonderful is willing to provide the debt to the firm. Since Mr$.$ Wonderful is

very savvy, he will be able to make the firm to avoid the financial distress costs if he is the

debtholder. Mr$.$ Wonderful, however, requests a $3\mathrm{.}5\%$ interest in the debt. As before, assume

the debt is risk$-$free.

a$.$ Calculate the firm cost of capital if the firm uses Mr$.$ Wonderful debt.

b$.$ Calculate the cost of equity if the firm uses Mr$.$ Wonderful debt.

c$.$ Should the firm finance the firm with equity, regular debt or with Mr$.$ Wonderful deb