Question 1:

In Case I, when the debt-to-firm value (D/V) increases from 0% to 50%,

a) Figure out the new cost of equity.

b) Figure out the old WACC with zero debt. Figure out the new WACC with debt of 50%.

\begin{tabular}{|l|l|} \hline Case I: Capital structure (no corporate tax) & Case II: Capital structure (corporate tax) \\ \hline Debt-to-firm value (D/V): 0% \\ Cost of equity: 10% \\ Cost of debt: 6% & Debt: $0 million \\ & EBIT: $40 million \\ & Tax rate: 50% \\ \hline \end{tabular}