1) JACK LLC and KEWEI Holdings are nearly identical in every way, expect JACK LLC is financed with 75% debt and KEWEI Holdings is financed with 75% equity. We would expect that JACK LLC will have a higher equity beta than KEWEI Holdings.

True

False

2) Eugene Shoes has an asset beta of 1.5 and is all equity. The company consists of two divisions: shoes and athletics apparel. The company has $75M of free cash flow today, and projected to generate cash flows of $60M each year starting next year, in perpetuity, that grow by 1 percent per year. Assume a risk free rate of 3.0 percent and a market risk premium of 6.0 percent. What is the maximum you would be willing to pay to acquire Eugene Shoes?

A) 620.45M

B) 575M

C 475.45M

3)Eugene Shoes has an asset beta of 1.5 and is all equity. The company consists of two divisions: shoes and athletics apparel. The shoe division is wants to sign a new WNBA star to a 5-year deal that starts next year. She is expected to sell 50K shoes per year at a price of $130.00 per shoe. The variable cost of producing each shoe is $20.00, and the star has requested an up-front payment of $5M this year. The discount rate of the shoe division is 9 percent. What is the net present value of signing the athlete?

A)21.39

B)56.11

C)16.39

4) Sea Wolves Solutions currently has 15M shares outstanding priced at $12 per share and 60K bonds outstanding priced at $200 per bond. The company has an equity beta of 0.8 and a debt beta of 0.15. What is the asset beta of the firm?

A) 0.76

B) 0.65

C) 0.84

5) Sea Wolves Solutions currently has 15M shares outstanding priced at $12 per share and 60K bonds outstanding priced at $200 per bond. The company has an equity beta of 0.8 and a debt beta of 0.15. The risk free rate is 3.0 percent and the expected return on the market is 9 percent. What is the correct discount rate for the firm?

A) 0.08

B) 0.13

C) 0.11