P R U Q1 fx 20pts D F G M N 0 1 XYZ Corp, has no debt. Its assets will be worth 600 million in one year if the economy docs well but only 300 million in one year if the economy does poorly. 2 Both events will occur with equal probability. The market value today of its assets is 400 million. 3 4 a) What is the expected return of XYZ stock without leverage?: 20pts 6 b) Suppose the risk free interest rate is 5%. If XYZ borrows 100million today at this rate and uses the proceeds to pay an immediate cash dividend, what will be the market value of its equity just after the 7 dividend is paid, according to MM? 8 9 ) What is the expected return of XYZ stock after the dividend is paid in part (b)? 10 11 12 14 15 17 18 19 25 34 35 Q1 Q2 03 Q4