1 Part 4 2 1. Answer the following two questions: Answers 3 a. Should you use one cutoff rate for all projects or adjust the discount rate based 4 b. Do you reject projects above or below the SML line? 5 2. If a firm's leverage increases, what happens to the firm's beta? 3. Assume the following information: A firm's capital structure is currently all 6 equity with an unlevered beta of 0.73. Taxes = 25%. Beta of debt = 0. + a. Scenario 1: Now the capital structure changes from 100% equity to 70% equity 7 and 30% debt. What is the new equity beta? b. Scenario 2: Now the capital structure changes from 100% equity to 40% equity 8 and 60% debt. The new tax rate = 15%. What is the new equity beta?