1. Suppose you are hired by Tom the CEO of a large company to determine the firm's cost of capital.Tom told you that his company's stock sells for $50 per share and the dividend will be about $5 per share. He argues that the cost of equity is equal to 10% (=$5/50) because it costs $5 to use stockholders' money. Is Tom statement correct and why?

2. List three MM assumptions and in a world without taxes. Are these assumptions reasonable in the real world?

3. According to MM with taxes, the value of the firm is maximized by taking on as much debt as possible. Can you find a real-world company (excluding financial institutions) with 100% or more debt financing? What are the challenges you may face when you run a company in the real world?