An unlevered firm has an asset market beta of 1.5. The risk-free

rate is 3%. The equity premium is 4%.

1. What is the firms cost of capital?

2. The firm refinances itself. It repurchases half of its stock with

debt that it issues. Assume that this debt is risk free. What is

the equity beta of the levered firm?

3. According to the CAPM, what rate of return does the firm

have to offer to its creditors?

4. According to the CAPM, what rate of return does the firm

have to offer to its levered equity holders?

5. Has the firms weighted average cost of capital improved