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A firm is solely financed by equity with market value of $50,000 and cost of equity...

  1. A firm is solely financed by equity with market value of $50,000 and cost of equity of 10%. It wishes to raise another $30,000 via corporate bonds with cost of debt of 5% and use all of it to buy back outstanding equity (no cash holding). Hold investment policies fixed.
    1. In a MM world without taxes,
      1. What would the firm value be after debt issuance? Firm Value = Equity Value + Debt Value - Cash.
      2. What would be the cost of equity after debt is raised?
      3. What would be the WACC after debt is raised?
    2. In a MM world with tax rate of 40%,
      1. What would be the cost of equity after debt is raised?
      2. What would be the additional value created by debt?
      3. What would be the WACC after debt is raised?
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