PART B Part B is worth 40 marks. There are two main questions, each worth 20 marks in total. Answer all parts of each question directly underneath that part. You may add more space if you need it. QUESTION 1 (a) XYZ Ltd has no debt, a market value of $200 million and a cost of equity of 12 percent. i) In Modigliani and Miller (MM) world with no taxes, what happens to the value of XYZ Ltd as its financial leverage is increased? (3 marks) ii) In an MM world with no taxes, what happens to XYZ Ltd's cost of equity and WACC as its financial leverage is increased? (4 marks) iii) If there are corporate taxes, what happens to the value of XYZ Ltd and its WACC as its financial leverage is increased? (3 marks) (b) The coronavirus pandemic has no doubt increased the probability and costs of financial distress for many companies, particularly in hard-hit industries such as tourism, hospitality and discretionary consumer goods. Explain the effect of an increase in financial distress costs on firm value and the optimal level of debt in a company's capital structure using relevant theory. (10 marks)