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# Halifax Tires Capital Structure You are asked to perform a capital structure analysis for Halifax Tires. The firm currently employs only equity to finance its

Halifax Tires Capital Structure You are asked to perform a capital structure analysis for Halifax Tires. The firm currently employs only equity to finance its operations. The EBIT of the firm is $2,000,000, which will remain at this level forever. The firm will pay all of its future earnings as cash dividends to its shareholders. You have gathered the following information to start your analysis. The risk-free rate is 2 percent, and the return on the market portfolio is 7 percent. The tax rate is 40 percent, and the costs for the risk of financial distress apply. With default risk, the borrowing rate for the firm will increase with financial leverage, as indicated in the table below. The market value of debt is equal to the book value of debt. 1. What is the value and WACC of this all-equity firm? 2. What would be the firm's value if the firm uses financial leverage with $2,400,000 debt? 3. What would be the present value of financial distress costs if the firm uses financial leverage with $2,400,000 debt? 4. What would be the firm's value if the firm uses financial leverage with $3,000,000 debt? 5 . What is the optimal capital structure: $0,$2,400,000, or $3,000,000 debt? 6. The personal tax rate on equity distributions is 10 percent, and the personal tax rate on interest is 43 percent. In this case, what is the optimal capital structure: $0,$2,400,000, or $3,000,000 debt

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