QUESTION 3

a. Discuss two direct costs of bankruptcy. (5 marks)

b. Consider the returns for Firm A and the market returns under the following economic conditions:

	FIRM A	MARKET
Depression	20%	10%
Recession	-4%	-2%
Normal	8%	3%
Boom	12%	5%

The value of the firm is known with P40 million debt and P60 million equity. This firm has 60 shares outstanding all held by management:

i. What is the expected return for Firm A and the market? (4 marks)

ii. Calculate the covariance between the returns of Firm A and the market return. (4 marks)

iii. Calculate the variance of the markets return. (4 marks)

iv. What will be the estimated beta for this firm? (3 marks