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A-Dyson Inc. currently finances with 20.0% debt (i.e., w _d = 20%), but its new CFO is considering changing the capital structure so w _d = 68.5% by issuing additional bonds and using the proceeds to repurchase and retire common shares so the percentage of common equity in the capital structure (w _c) = 1 w _d. Given the data shown below, by how much would this recapitalization change the firm's cost of equity? Do not round your intermediate calculations. (Hint: You must unlever the current beta and then use the unlevered beta to solve the problem.)

Risk-free rate, rRF	5.00%		Tax rate, T	25%
Market risk prem, RPM	6.00%		Current wd	20%
Current beta, bL1	1.20		Target wd	68.5%

1-11.13%

2-8.72%

3-7.79%

4-9.27%

5-8.81%

B-As a consultant to First Responder Inc., you have obtained the following data (dollars in millions). The company plans to pay out all of its earnings as dividends, hence g = 0. Also, no net new investment in operating capital is needed because growth is zero. The CFO believes that a move from zero debt to 80.0% debt would cause the cost of equity to increase from 10.0% to 14.0%, and the interest rate on the new debt would be 9.0%. What would the firm's total market value be if it makes this change? Hints: Find the FCF, which is equal to NOPAT = EBIT(1 - T) because no new operating capital is needed, and then divide by (WACC - g). Do not round your intermediate calculations.

Oper. income (EBIT)	$800		Tax rate	25.0%
New cost of equity (rs)	14.00%		New wd	80.0%
Interest rate (rd)	9.00%

1-4,917

2-5,854

3-7,317

4-6,205

5-5,561

C-You work for the CEO of a new company that plans to manufacture and sell a new type of laptop computer. The issue now is how to finance the company, with only equity or with a mix of debt and equity. Expected operating income is $680,000. Other data for the firm are shown below. How much higher or lower will the firm's expected EPS be if it uses some debt rather than only equity, i.e., what is EPS _L - EPS _U?

	0% Debt, U		60% Debt, L
Oper. income (EBIT)	$680,000		$680,000
Required investment	$2,500,000		$2,500,000
% Debt	0.0%		60.0%
$ of Debt	$0.00		$1,500,000
$ of Common equity	$2,500,000		$1,000,000
Shares issued, $10/share	250,000		100,000
Interest rate	NA		10.00%
Tax rate	25%		25%

1-2.32

2-2.13

3-1.74

4-1.35

5-1.94