Question five:(10 marks) You are trying to estimate the beta for a private firm that manufactures home appliances. You have managed to obtain betas for publicly traded firms that also manufacture home appliances Firm Samsung Magic Smart LG Fakir Levered Beta 1.4 1.5 1.2 1.1 0.7 Debt (in millions) $2,400 $2,800 $520 $6 $9 b) Calculate the debt to equity ratio for each firm. (3 marks) The private firm has a debt-to-equity ratio of 20% and faces a tax rate of 40%. The publicly held firms all have marginal tax rates of 40% as well. a) Calculate the average levered beta for comparable firms. (1 mark) c) Calculate the average debt to equity ratio. (1 mark) Market value of equity in millions) $3,200 $4,200 $2,000 $300 $500 5 d) Estimate the average unlevered beta of comparable firms. (1 mark) c) Estimate the beta for the company based on comparable firms. (1 mark) f) The beta of a firm reflects three fundamental decisions a firm makes. List the three determinants of beta. (3 marks) Question two: (3 marks) Rasha and Saeed studying Corporate Finance were overheard in the library debating the treatment of depreciation in capital budgeting projects just before the exam. Rasha said: "You are wrong, depreciation is never included in project cash flows". However, Saeed responded with: "The formula sheet given by the lecturer for the exam includes depreciation expenses when calculating the project's after-tax cash flows". Write a clear and accurate response you would offer these two students to explain the appropriate treatment of depreciation for capital budgeting purposes. Question three: (2 marks) As a capital budgeting analyst, you find a project that has cash inflows of $250 million each year for the next 4 years, and you also find that the payback for this project is exactly 2 years. Based on this information, compute the initial investment for this project