Pasco Corporation has a beta of $0\mathrm{.}9.$ The market risk premium is $10$ percent, and T$-$bills

are currently yielding $3$ percent. The company's last dividend was $$2\mathrm{.}26,$ and its current

stock price is $$48.$ Assume Greene's dividends were expected to grow at a $6$ percent

annual rate indefinitely.

Pasco has $5$ million shares of common stock outstanding, and $120,000$ bonds outstanding,

$7$ percent coupon, $8$ years to maturity, selling for $$930$ for each bond with $$1,000$ par

value. Bonds make annual payments. Assume the company's tax rate is $30$ percent.

$($a$)$ Calculate the cost of equity using the Constant Dividend Growth Model $($CDGM$)$

and SML method $($CAPM$),$ respectively.

$(5$ marks$)$

$($b$)$ Why do you think two estimates in $($a$)$ using different methods are different?

$(8$ marks$)$

$($c$)$ Using the average value of cost of equity estimated using two methods in $($a$)$ to

calculate Pasco,s WACC.

$(6$ marks$)$

$($d$)$ Explain the 'separation theorem'.

$(6$ marks$)$