1. XYZ corporation is completely owned by equity holders. It has 100 outstanding com mon shares. The stock is priced "fairly" at $20 per share. The CFO has chosen the best investment projects, which bring the firm a return of $3000 at t. (a) What is the firm's cost of capital? (b) What is the price of the firm's stock at t? At t, the firm is not liquidated, because the CFO finds another profitable investment project. This new investment project can bring the firm a return of $5000 at tz. At t1, the firm needs to finance another $1000 to do the new investment. It is either by all equity ($1000 more equity) or by all debt ($1000 debt with interest rate 10%). So, the CFO have two options to finance the new budget: the first option is by only equity and the second option is by both debts and equity. (c) What is the cost of capital if the CFO decides to finance through the first option? (d) Consider the second financing option. What is the weighted average cost of capital of the firm? (e) What are the weights of debts and equities if the CFO finances by the second option? (f) What is the equity holders' rate of return? 2. A firm can be worth $100 million (with 20% probability), $200 million (with 60% probability), or $300 million (with 20% probability). The firm has one senior bond outstanding, the present value of the bond is $80 million. It also has one junior bond outstanding, its present value is $70 million. The senior bond promises an interest rate of 5%. The junior bond promises an interest rate of 26%. If the firm's projects require an appropriate cost of capital of 10%, then what is the firm's levered equity cost of capital? (Hint: the firm has to pay the senior bonds first and then the junior bonds.]