** PLEASE ANSWER D, USING BOTH MM THEORIES AND THE EFFECT OF THE TAX SHIELD!***

Burberry Group PLC is a British fashion clothing company. It is considering the replacement of one of its existing machines with a new model. The existing machine can be sold now for 10,000. The new machine costs 60,000 and will generate free cash flows of 12,560 p.a. over the next 5 years. The corporate tax rate is 30%. The new machine has average risk. Burberrys debt-equity ratio is 0.4 and it plans to maintain a constant debt-equity ratio. Burberrys cost of debt is 6.30% and its cost of equity is 14.25%.

d) Given the capital structure change in question c), Modigliani and Miller would argue that according to their theory, Burberrys WACC should decline because its cost of equity capital has declined. Discuss. (10 marks)