1.Company ABC has issued both bonds and common equity in capital market. A bad news hits Company ABC and leads to price of bonds issued by ABC to decline sharply. Will this news also affect the cost of common equity (without floatation cost)? Why or why not?

2.Company CDEs common stock is currently traded at $40 a share. It is expected to distribute a dividend of $2 a share next year. The average yield to maturity of bonds issued by CDE is 8%. Assume that the CDEs common stock has a risk premium of 4% relative to its yields. What is the implied growth rate of dividends expected by market investors?

3.

Company ABC has a beta of 1.5 while Company BCD has a beta of 0.9. When stock market risk premium (average stock market return minus risk-free interest rate) increases, which company will see their share price rise more than the other?