Angel Pty Ltd is an all-equity-financed company with $550,000 in stock. BetaCo. Utilizes both debt and equity financing- the debt has an interest rate of 8% p.a. and the stock is currently worth a total of $275,000. Both companies are identical in all respects except their capital structures and expect to earn annual earnings before interest and tax (EBIT) of $60,000. Assume there are no market imperfections or taxes in this scenario.

1. An investor owns $20,000 worth of stock in BetaCo. What rate of return are they expecting? (2 marks)
2. Demonstrate how you could generate exactly the same rate of return and cash flows from part (a) by investing in Angel Pty Ltd. Assume that you have access to a bank borrowing and lending rate equal to Angel Pty Ltd and BetaCo. (5 marks)
3. What is the cost of equity for Angel Pty Ltd and BetaCo? (3 marks)
4. What is the weighted average cost of capital (WACC) for Angel Pty Ltd and BetaCo? (3 marks)
5. Using the Modigliani and Miller theorems (Capital Structure), discuss how WACC return on assets, cost of equity, and the debt-equity ratio all relate to each other. (3 marks)
6. What can you conclude about capital structure decisions from this scenario in parts (a)-(e)? Explain. (4 marks)
7. We see many different debt-equity ratios utilized by corporations in practice. Using all the different capital structure theories, discuss why this might be the case. (5 marks)