Consider Seven Brothers $($SB$)$ Limited, a debt$-$free company $($unlevered firm$)$ operating in perfect markets, which consistently earns $1,000,000$ in net operating income $($EBIT$)$ annually. Firms in this industry typically require an $8\%$ return on assets. SB Limited decides to issue $6,000,000$ in perpetual debt at a $6\%$ interest rate and uses the funds to buy back $($repurchase$)$ shares. Refer to Table $1$ for details of the new capital structure. With a corporate tax rate of $25\%,$ apply Modigliani$-$Miller Propositions I and Il to:$1.$ Calculate the present value of the debt tax shield. $(2$ marks$]\mathrm{.}2.$ Calculate SB$\text{'}$s value after the share repurchase. $(2$ marks$]\mathrm{.}3.$ Calculate the new required return on SB$\text{'}$s equity after the share repurchase. $[2$ marks$]\mathrm{.}4.$ Compute and compare the weighted average cost of capital $($WACC$)$ after the share repurchase, both with and without corporate tax. Explain why there is a change in the WACC, if any. $14$ Marks$]$

Question $28$

$10pts$

Consider Seven Brothers $($SB$)$ Limited, a debt$-$free company $($unlevered firm$)$ operating in perfect markets, which consistently earns $1,000,000$ in net operating income $($EBIT$)$ annually. Firms in this industry typically require an $8\%$ return on assets. SB Limited decides to issue $6,000,000$ in perpetual debt at a $6\%$ interest rate and uses the funds to buy back $($repurchase$)$ shares. Refer to Table $1$ for details of the new capital structure. With a corporate tax rate of $25\%,$ apply ModiglianiMiller Propositions I and II to:

Calculate the present value of the debt tax shield. $[2$ marks$].$

Calculate SB$\text{'}$s value after the share repurchase. $[2$ marks$].$

Calculate the new required return on SB$\text{'}$s equity after the share repurchase. $[2$ marks$].$

Compute and compare the weighted average cost of capital $($WACC$)$ after the share repurchase, both with and without corporate tax. Explain why there is a change in the WACC, if any. $[4$ Marks$]$

Table $1$: Current and Proposed Capital Structure of Seven Brothers $($SB$)$ Limited

$\backslash$table$[[,,$Figures in thous ands$],[-1,$Current $($Unlevered $=$ U$),$Proposed $($Levered $=$ L$)],[\frac{?}{\text{b}\text{a}\text{r}}($ Assets $),\backslash$table$[[15,000$