(A) When Cadbury and Kraft merged, the volatility of the combined firm's assets was less than the volatility of the assets of either Kraft or Cadbury prior to the merger. Explain how this reduction in risk affects the combined firm's cost of capital. Explain

(B) In a Modigliani-Miller world, increases in leverage raise the expected return on equity. This increase the value of the equity and thus makes shareholders better off. True, False or Uncertain? Explain. (20)

(C) The most recent tax reform act allows firms to write off their assets much faster. Thus instead of depreciating a $100K piece of equipment over five years ($20K per year), the firm can expense the asset completely in the first year. This means the firms would have a depreciation expense of $100K the first year, opposed to $20K the first year. This will lower the firm's income the first year. Will the ability to write off their capital investments faster raise or lower the value of the firm? Explain completely. Think about how the present value of the cash flow from assets changes. Explain

(D) The Diversified Market Advantage (DMA) hedge fund purchases half of the publicly traded stocks using a proprietary model. I estimated the CAPM regression on DMA's historic returns and the results are reported below. If you had access to DMA's strategy and their performance continues, suggest an investment strategy that creates value. Explain briefly.