Please workings should be showed

Problem 4: Capital Structure (24 Points) In a Modigliani-Miller world, Publicvehicle Inc. is an automobile company that is completely equity financed. The company value next year will be 675m (p=0.2), E90m (p=0.5) or 100m (p=0.3). [Note that the "company value next year" means the same as the "cash flows if the firm was liquidated at the end of the year"]. Publicvehicle Inc.'s unlevered beta value is 1.5, the expected return of the market portfolio is 10% and the risk free rate is 5%. 1. Calculate Publicvehicle Inc.'s market value today. First calculate the market value next year, then the appropriate discount rate and then the firm value (10 points) 2. Suppose now that Publicvehicle Inc. is not purely equity-financed but has risk- free debt of 630m face value due next year. Tip: Determine the following figures step by step: Determine the D/E Ratio in t=1. Determine the debt value in t=0. Determine the equity value in t=0. Determine the D/E ratio in t=0. Determine the return on equity (cost of equity). Determine the WACC. (14 points) Activate Window