consider a firm 1 that is unlevered and firm 2 which is levered with target debt to equity ratio(b/s)=1.Both firm have exactly the same perpetualnet operating income,NOI OF 180 before tax.the before tax cost of debt,kb is the same as risk free rate.the corporate tax is 0.5 .given the following market parameters, E(rm)=0.12 d2(market variance)=0.0144 rf=0.06 beta of firm 1=1 beta of firm 2=1.5

required

a.)find the cost of capital for each of the firms (ignore personal taxes).

b. Evaluate the following four projects to determine their acceptance or rejection by firms 1 and 2 what do the results in this evaluation tell you about leverage in a world with corporate taxes but no personal taxes? (note r jm is the correlation between the unlevered free cash flows of each project and the market)

PROJECT	COST j	E(NOI)After-tax	j	r jm (correlation of j with market)
1	100	9	0.10	0.6
2	120	11	0.11	0.7
3	80	9	0.12	0.8
4	150	18	0.20	0.9