1. If an investor buys a portion (X) of both the debt and equity of a levered firm, then his/her payoff is

   1. (X) (profits).

   2. (X) (interest).

   3. (X) (profits interest).

   4. (X) (profits interest + depreciation).

   5. None of the choices.

2. Question 4

   SQ Inc. is an all-equity firm that has an expected return of 17%. If the company repurchases 25 percent of the common stock and substitutes an equal value of debt yielding 6 percent, what is the expected return on the common stock after refinancing?(Ignore taxes.)

   1. 23.32%

   2. 20.67%

   3. 17.00%

   4. 15.85%

   5. 12.33%

3. Question 5

   A firm has a debt-to-equity ratio of 1.80. Its cost of debt is 9 percent. Its overall cost of capital is 12.2 percent. What is its cost of equity if there are no taxes?

   1. 10.15%

   2. 12.82%

   3. 13.48%

   4. 15.11%

   5. 17.96%