In 1a, 1b, could you explain more detail why we plug in those number? And hows the formula/ equation work?

In 1c, why the E=1?

Thank you!!

SOLUTIONS TO THE FINAL (35 points total) Rednow Co. pays 40% in corporate taxes and is financed entirely by common stock with a 1,000 shares outstanding trading at $105 per share. Rednow has only assets-in-place and, thus, does not grow. (1) The CAPM beta of Rednow's equity, , is the same as the CAPM asset beta, , of LillyUpok,a company with a zero tax rate, market risk of 37.5%, and financed by equity and risk-free debt yielding 5%. LillyUpick's debt-to-equity ratio is You should treat LillyUpick assets as a portfolio of equity and risk-free debt with portfolio weights equal to fD and respectively (i) (3 points) If the excess return (i.e. T-ri) on the efficient portfolio with the same risk as the Lilly Upick's market risk is 1.5 times the market risk premium, calculate LillyUpick's equity beta, LU Using CML and the fact that the market risk of LU is B we have M = 15. from where we immediately obtain that (ii) (2 points) Calculate the expected market return, Im, if the market's Sharpe's ratio is equs to 0.4; From the SR we have: r,n = 5% + 0.4 , and from the LU's market risk we have that 0.375/ 1.5 0.25. M 15%. Substituting it back into the formula for rm yields rm (ii) (2 points) beta of Lilly Upick's assets, BLU; Using the formula for the portfolio beta we obtain: LU