Question 2:

In Case II, when the debt increases from $0 to $60mil.,

a.) Figure out the levered firms value.

b.) Figure out the optimal capital structure. In other words, does the capital structure affect the WACC?

\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}