Question 1: Answer the following questions: (8 Marks)

1. Consider two hypothetical firms: Firm U, which uses no debt financing, and Firm L, which uses 10,000 of 12 percent debt. Both firms have 20,000 in assets, a 40 percent tax rate, and an expected EBIT of 3,000. Construct partial income statements, which start with EBIT, for the two firms. (3 Marks)

2. Use the following data for the Sara Company to calculate the cost of common stocks (Rs), the cost of Preferred stocks (Rps), and the cost of Debt: (Rd)? (13= 3 Marks)

Item	Symbol	Value
Risk Free Rate	Rf	7%
Stock Risk	B	1.5
Market Return	Rm	25%
Interest Rate for Debt	Rd (B.T)	9%
TAX rate	T	5%
Preferred Stock Dividend	D(ps)	10
Preferred Stock Price	P(ps)	100
floatation cost ps	FC	$4

3. Healthy Snacks, Inc. has a target capital structure of 55 percent common stock, 5 percent preferred stock, and 40 percent debt. Its cost of equity is 14.3 percent, the cost of preferred stock is 8.9 percent, and the pretax cost of debt is 8.1 percent. What is the company's WACC if the applicable tax rate is 35 percent? (2 Marks)