Extra Practice Problem on computing WACC
You do not need to turn this in US Online provides internet access to consumers in continental US. The firm has (i) 100,000 shares outstanding; and (ii) $ 2 mm of debt yielding 10% p.a. in its capital structure. Its shares are listed on NASDAQ and trade at a price of $ 20, and the firm will have EBIT of $450,000 p.a. to perpetuity. Assume that the corporate tax rate is zero.
     1. Compute the required rate of return for (the levered) US
	Online equity. 
     2. Compute the WACC for US Online.
     3. Suppose US Online decides to unlever by issuing equity and
	retiring all its outstanding debt. What would be the new
	required rate of return for its equity?  
     4. Do you think US Online ought to unlever in light of your
	answers to parts (1) and (3)? Explain your answer.
     5. Compute US Online's earnings per share [EPS] when (i) it was
	levered; and (ii) when it is unlevered. What is wrong with the
	following argument? 
	US Online's EPS is higher when it is levered. Hence, the
	   firm should lever up, in order to maximize shareholder value.