2. Your firm has $50 million in equity and $30 million in preferred stock outstanding. They have just issued $20 million in new debt at par with a 10% coupon rate. The dividend yield on the preferred stock is 9%. The firm's equity beta is 1.2, the risk free rate is 2%, the expected return on the market is 7%, and the corporate tax rate is 21%. What is the firm's return on assets? [3 points]

3. A firm has a project that requires $100 million in financing. The cash flows from the project will either be $70 million in the bad state of the world, and $200 million in the good state of the world. The probability of the economy being in the bad state is 40% and the probability of the economy being in the good state is 60%.

(a) If the firm accepts the project and finances it with 100% equity, what is the expected return on the equity? [2 points]

(b) If the firm accepts the project and finances it with 100% equity, what is the expected return on the assets? [2 points]

(c) If the firm accepts the project and finances it with $40 million in equity and $60 million in debt with a 10% coupon payment, what is the expected return on the equity? [2 points]

(d) If the firm accepts the project and finances it with $40 million in equity and $60 million in debt with a 10% coupon payment, what is the expected return on the assets? [2 points]

(e) Explain why your answers to parts a and c above are different. [1 point]