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Solve the following problem on a single Excel worksheet. Show all your work. Use formulas for all calculations. Provide notation for all outside sources. RECALL THAT HOMEWORK #3 PRESENTED THE FOLLOWING INFORMATION. The Peeps Nasty Corporation has hired you to evaluate its capital structure and to recommend potential alterations. You have been given the following information: The firm is currently financed with a capital structure that is comprised of 100% equity (0% debt), and the firm's beta is 1.0. The firm is considering changing its capital structure to include some amount of debt, although the company is not certain how much debt it should take on; however, the firm is certain that it would not take on more than 50% debt (i.e., a debt-to-equity ratio of 1). If the firm decides to include debt in its capital structure, it will use the funds raised through debt to repurchase shares of stock (essentially swapping equity for debt). The risk-free rate of interest is 6%, the return on the market is 12%, and the firm's tax rate is 40%. If the firm takes on debt, it expects that its cost of debt will follow the table below. % Debt Cost of Debt 0% 0% 10% 7% 20% 8% 30% 8.5% 40% 10% 50% 12% RECALL THAT YOU WERE REQUIRED TO DO THE FOLLOWING FOR HOMEWORK #3. First, build a spreadsheet that demonstrates the following items: The firm's levered beta The firm's cost of equity The firm's WACC Make sure to calculate these values for 6 capital structure combinations that correspond to the table above (i.e., 100% equity/0% debt, 90% equity/10% debt, 80% equity/20% debt, ..., 50% equity/50% debt). Second, identify which capital structure is optimal (best) for the company. FOR HOMEWORK #4, WE INTRODUCE ADDITIONAL INFORMATION: The firm's current Free Cash Flow (FCF) is $75 million FCF is expected to grow at 2% per year for the foreseeable future Peeps RNasty can be evaluated using a perpetuity model The company has $25 million in short term investments The company has no preferred stock and 25,000,000 common shares outstanding FOR HOMEWORK #4, YOU ARE REQUIRED TO EXPAND YOUR TABLE FROM HOMEWORK #3 TO Calculate the value of operations for all of the proposed capital structures, Calculate the value of the firm in total for all of the proposed capital structures, Calculate the values of debt and equity that correspond to each total value of the firm, and Calculate the value (price) per share at each proposed capital structure level. Answer the following: Based on the new information for Homework #4, what capital structure do you recommend? Did your recommended capital structure change when compared to your answer from Homework #3? If so, why? If not, why not? Solve the following problem on a single Excel worksheet. Show all your work. Use formulas for all calculations. Provide notation for all outside sources. RECALL THAT HOMEWORK #3 PRESENTED THE FOLLOWING INFORMATION. The Peeps Nasty Corporation has hired you to evaluate its capital structure and to recommend potential alterations. You have been given the following information: The firm is currently financed with a capital structure that is comprised of 100% equity (0% debt), and the firm's beta is 1.0. The firm is considering changing its capital structure to include some amount of debt, although the company is not certain how much debt it should take on; however, the firm is certain that it would not take on more than 50% debt (i.e., a debt-to-equity ratio of 1). If the firm decides to include debt in its capital structure, it will use the funds raised through debt to repurchase shares of stock (essentially swapping equity for debt). The risk-free rate of interest is 6%, the return on the market is 12%, and the firm's tax rate is 40%. If the firm takes on debt, it expects that its cost of debt will follow the table below. % Debt Cost of Debt 0% 0% 10% 7% 20% 8% 30% 8.5% 40% 10% 50% 12% RECALL THAT YOU WERE REQUIRED TO DO THE FOLLOWING FOR HOMEWORK #3. First, build a spreadsheet that demonstrates the following items: The firm's levered beta The firm's cost of equity The firm's WACC Make sure to calculate these values for 6 capital structure combinations that correspond to the table above (i.e., 100% equity/0% debt, 90% equity/10% debt, 80% equity/20% debt, ..., 50% equity/50% debt). Second, identify which capital structure is optimal (best) for the company. FOR HOMEWORK #4, WE INTRODUCE ADDITIONAL INFORMATION: The firm's current Free Cash Flow (FCF) is $75 million FCF is expected to grow at 2% per year for the foreseeable future Peeps RNasty can be evaluated using a perpetuity model The company has $25 million in short term investments The company has no preferred stock and 25,000,000 common shares outstanding FOR HOMEWORK #4, YOU ARE REQUIRED TO EXPAND YOUR TABLE FROM HOMEWORK #3 TO Calculate the value of operations for all of the proposed capital structures, Calculate the value of the firm in total for all of the proposed capital structures, Calculate the values of debt and equity that correspond to each total value of the firm, and Calculate the value (price) per share at each proposed capital structure level. Answer the following: Based on the new information for Homework #4, what capital structure do you recommend? Did your recommended capital structure change when compared to your answer from Homework #3? If so, why? If not, why not

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