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The Teenie Tiny Company is currently an un-levered firm with a beta of 1.3925. Since this is a start-up company with significant impact on the social well-being of the country, the firm was given a tax- exempt status for the first five years of operation. In the market, you observe that the latest Government of Canada T-bill issue is yielding 3% and the market risk premium is 8%. This is the last year for the company's tax-exempt status. Assuming that the tax rate will be 40% and that there is no cost for the risk of default. Use the following table to answer these questions: EBIT Tax Rate T-bill Rate TSX 800,000 40% 3.0% 11.0% Value of Debt 0 250,000 500,000 750,000 1,000,000 1,250,000 1,500,000 1,750,000 2,000,000 RD 5.0% 5.0% 5.0% 5.0% 5.0% 5.0% 5.0% 5.0% 5.0% Beta 1.392500 1.483015 1.542274 1.607016 1.678038 1.756303 1.842075 1.939488 2.047619 d) Using the information from the table, calculate the value of the firm (proposition 1), cost of equity, and the WACC (proposition II) of the firm for each level of debt. (16 marks) Debt Un-levered TD Levered Equity 250,000.00 500,000.00 750,000.00 1,000,000.00 1,250,000.00 1,500,000.00 1,750,000.00 2,000,000.00 WACC Wd r*(1-T) We re e) Using the information from your calculations draw the graphs for proposition I and proposition II. (4 marks)

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