4. Macro Development Agency (MDA) has a market capitalization of $35 million and a debt-equity ratio of 0.5. The current risk-free rate is 3% and the following table displays the returns on MDA's stock and a market index in the past 8 years: Year Return on MDA (%) 2010 2011 2012 2013 2014 2015 2016 2017 27 -7 17 Return on market index (%) 20 10 5 33 19 12 -19 -5 22 -5 -11 6 12 (a) Estimate MDA's beta by considering the sample covariance between MDA's return and the market return. Hence, estimate MDA's equity cost of capital under the CAPM framework. Does MDA's stock appear overpriced or underpriced? [5 marks] (b) Suppose the relevant equity cost of capital and debt cost of capital are 14% and 9%, respectively. MDA's corporate marginal tax rate is 25%. i. Calculate MDA's after-tax weighted average cost of capital (WACC). [3 marks] ii. MDA plans to issue $10 million's worth of bonds. As a result of the increased debt-equity ratio, the value of the existing bonds is marked down by 4%. Following this change in the capital structure, you are given that the new equity cost of capital is equal to 1.5 times the new debt cost of capital. Assuming that the Modigliani-Miller propositions hold, calculate MDA's new after-tax WACC. [6 marks]