1. John plc has 10 million shares outstanding and the current share price is 4. These ordinary shares have a beta of 1.2. The risk-free rate on government bonds is 5% and the expected rate of return on the market portfolio is 15%. The market value of its debt amounts to 10m and costs 12% per year before allowing for tax shield benefits. The corporation tax rate is 30%. What is the firms WACC?

2. Pelamed Pharmaceuticals has EBIT of $325 million in 2015. In addition, Pelamed has interest expenses of $125 million and a corporate tax rate of 40 percent.

1. What is Pelameds 2015 net income?

2. What is the total of Pelameds 2015 net income and interest payments?

3. If Pelamed had no interest expenses, what would its 2015 net income be? How does it compare to your answer in part (b)?

4. What is the amount of Pelameds interest tax shield in 2015?

3. If I use the after-tax cost of debt for my project analysis then I should use the after-tax cost of equity as well. Do you agree with this statement? Explain

4. Celebrity plc. has a target debt-equity ratio of 0.8. Its WACC is 10.5% and the tax rate is 35 per cent

(a) If the firms cost of equity is 15 per cent what is its pre-tax cost of debt?

(b) If instead you know that the after-tax cost of debt is 6.4 per cent, what is the cost of equity?