a) Cost of equity (as per CAPM ) = risk free rate + beta * market risk premium = 5%+ 1*5% = 10%

WACC = 20%*5%+80%*10% = 9%

Value of firm (zero growth model)

= Free cashflows / WACC

= £ 9 million / 9% = £100 million

Total Firm value =  £100 million

Value of equity = 80% * £100 million = £80 million

Price of each share =  £80 million/ 40 million shares = £2 per share

b) Dividend per share =  £5 million / 40 million shares = £0.125 per share

New Share price = £2 per share -  £0.125 per share =  £1.875 per share

After raising debt and paying dividend

Value of Equity =  £1.875 per share* 40 million = £75 million

Value of Debt = £20 million + £5 million = £25 million

Expected return on equity (levered cost of equity)

=WACC + (WACC -cost of debt)* (1-tax rate)*D/E

=9%+(9%-5%)*(1-0)* (25/75)

=10.3333%

Shareholders are neither better off or worse off , Shareholders' risk has increased (as reflected in their increased requied rate) and their cashflows have also increased correspondingly.

c) In case of taxes, Value of levered firm (with more leverage or more debt) will be more as

Value of levered firm = value of unlevered firm + value of Debt *tax rate

Thus, in this case, when taxes are present, the company would benefit from the reduced amount of taxes and hence the overall value of the firm would increase'. Accordingly the WACC would also be lesser than 9%

Sharholders' will benefit in this case as the increased value due to increased debt would be attributable to the shareholders only.

However, it may be noted that at very high levels of debt, cost of debt will increase as well as insolvency related costs will also increase , so a proper tradeoff is required to increase the value of firm.