No. 1 Lucky Cement is trying to establish its optimal capital structure. Its current capital structure consists of 20% debt and 80% equity; however, the CEO believes that the firm should use more debt. The risk-free rate, rRF, is 5%; the market risk premium, RPM, is 6%; and the firm's tax rate is 40%. Currently, Lucky Cement has beta of 1.5. What would be Lucky Cement's estimated cost of equity if it changed its capital structure to 40% debt and 60% equity? Should the company opt new capital structure? (decide based on the cost of equity computations)?

N0.2 Why you agree or disagree with the following statements

a.A firm should select the capital structure that is fully levered

b.Leveraged beta represents fundamental operating risk.

c.MM Proposition I with no tax supports the argument that a firm should borrow money to the point where the tax benefit from debt is equal to the cost of the increased probability of financial distress

N03 . Mubashir Ali is negotiating his employment contract. His opportunity cost is 14%. He has been offered three possible 4-year contracts. Payments are in Pakistani rupees and are guaranteed, and they would be made at the end of each year. Terms of each contract are as follows:

Contract Year 1 Year 2 Year 3 Year 4 Contract 1 4 Million 4 Million 4 Million 4 Million Contract 2 7 Million 1 Million 1 Million 1 Million Contract 3 9 Million 0.5 Million 0.5 Million 0.5 MillionIncome Statement Sale 4.200 Operating costs 3.780 EBIT 420 Interest 120 EBT 300 Taxes (40%) 120 Net Income 180 Dividends 0 Addition to retrained earnings 180 Balance Sheet Cash and marketable securities 42 Accounts receivable 336 Inventories 441 Current Assets 819 Net fixed assets 2.562 Total Assets 3.381 Accounts payable and accruals 168 Notes payable 250 Current liabilities 418 Long term debt 700 Common stock 400 Retained earnings 1863 Total liabilities and equity 3.381 0