Case I: Capital structure theory (no tax) WACC : 10%
Debt-to-firm value(D/V): 60%
Cost of debt : 6%
1) In Case I, when the debt-to-firm value decreases from 60% to 50%,
i) Figure out the new WACC. Does the capital structure affect WACC?
ii) Figure out the new WACC. Does the capital structure affect the cost of equity?
Case II: Capital structure theory (corporate tax)
EBIT : $40 million
Tax rate : 50%
Unlevered cost of capital : 10%
2) In Case II, when the debt increases from $0 to $40mil.,
i) Figure out the unlevered firm’s value.
ii) Figure out the levered firm’s value.
iii) What is the optimal capital structure? In other words, does the capital structure affect the WACC?

He moto hotel opened for business on may 1, 2017. here is its trial balance before adjustment on may 31. moto hotel trial balance may 31, 2017 debit credit cash $ 2,283 supplies 2,600 prepaid insurance 1,800 land 14,783 buildings 72,400 equipment 16,800 accounts payable $ 4,483 unearned rent revenue 3,300 mortgage payable 38,400 common stock 59,783 rent revenue 9,000 salaries and wages expense 3,000 utilities expense 800 advertising expense 500 $114,966 $114,966 other data: 1. insurance expires at the rate of $360 per month. 2. a count of supplies shows $1,050 of unused supplies on may 31. 3. (a) annual depreciation is $2,760 on the building. (b) annual depreciation is $2,160 on equipment. 4. the mortgage interest rate is 5%. (the mortgage was taken out on may 1.) 5. unearned rent of $2,580 has been earned. 6. salaries of $810 are accrued and unpaid at may 31