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10. A firm has a debt-to-equity ratio of 4:1. The firms debt beta is 0.5. Five-year government bonds yield 5% pa with a coupon rate

10. A firm has a debt-to-equity ratio of 4:1.

The firms debt beta is 0.5.

Five-year government bonds yield 5% pa with a coupon rate of 6% pa. The market's expected dividend return is 2% pa and its expected capital return is 8% pa.

The firm stocks next dividend is expected to be $3, paid one year from now. Dividends are expected to be paid annually and grow by 2% pa forever. The current stock price is $15.

The corporate tax rate is 30%. Assume a classical tax system.

Which statement is NOT correct?

a.

The expected return on equity is 22% pa.

b.

The expected return on debt is 7.5% pa.

c.

The beta of the firm's equity is 3.4.

d.

The beta of the firms assets is 1.08.

e.

The firms after-tax WACC is 10.40% pa.

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