1. The asset beta for an art gallery is 1.9. The risk free rate is 2.2%, an S&P500 index fund returns 11.5%, and the tax rate is 27%.

a. If you are opening an art gallery, what would your unlevered cost of capital be?

b. If you can borrow at 4%, and your firm is financed with 60% debt, 40% equity, what is your levered cost of equity?

c. If setting up your art gallery costs $1M today, and will produce $125,000 in EBIT per year for the next 25 years, what is the NPV of opening the gallery, using the WACC method?

d. List two ways in which your art gallery violates Modigliani-Miller assumptions.