a) A car loan requiring Monthly payments carries an APR (annual percentage

rate) of 8.5%. What is the effective annual rate of interest?

b) Belgrade plc needs $1.0 million (total corporate fund) to invest in building and

machines and the required return for an all equity firm at that level of

systematic risk is 20% and unsystematic risk 6%. Belgrade plc pays a corporate

tax, tc, of 30% and expected EBIT of $1.2m. Let the firm considers two types of

capital structures. Belgrade would fund its project with all equity without any

debt under plan I. Under plan II, the company would have $0.5m of debt, B.

The cost of debt is 10%.

Based on MM proposition of irrelevance theory, determine the level of returns

(additional value) that the company would provide to its shareholders and

debenture holders. Critically evaluate the effect of gearing in Belgrade's

capital structure in the context of MM proposition.