Q1. Yellowknife Mining has

70 million shares that are currently trading for $5 per share and $70 million worth of debt. The debt is risk free and has an interest rate of 4%,and the expected return of Yellowknife stock is 10%. Suppose a mining strike causes the price of Yellowknife stock to fall 20% to $4.00 per share. The value of the risk-free debt is unchanged. Assuming there are no taxes and the risk (unlevered beta) of Yellowknife's assets is unchanged, what happens to Yellowknife's equity cost of capital?

Q2.

Starpak Industries owns assets that will have a 60% probability of having a market value of $42 million in one year. There is a 40% chance that the assets will be worth only $12 million. The current risk-free rate is 4%, and Starpak's assets have a cost of capital of 8%.

a. If Starpak is unlevered, what is the current market value of its equity?

b. Suppose instead that Starpak has debt with a face value of $12 million due in one year. According to MM, what is the value of Starpak's equity in this case?

c. What is the expected return of Starpak's equity without leverage? What is the expected return of Starpak's equity with leverage?

d. What is the lowest possible realized return of Starpak's equity with and without leverage?