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1. The M&M Company is financed by $25 million in debt (market value) and $49 million in equity (market value). The cost of debt is 8 percent and the cost of equity is 19 percent. Calculate the weighted average cost of capital assuming no taxes.

12.93%

16.02%

14.79%

15.28%

13.54%

2. A firm has a debt-to-equity ratio of 0.63. Its cost of debt is 5.1 percent. Its overall cost of capital is 13.7 percent. What is its cost of equity if there are no taxes?(Hint: use MMII)

20.41%

19.12%

18.39%

17.56%

16.77%

3. Suppose Cowles Corp.'s market value of debt is $10,000,000 and it has 1,200,000 shares selling at $15 per share. What is the WACC if the cost of debt is 6% and the expected rate of return on the stock is 15.9%, given the marginal tax rate is 21%? What is the opportunity cost of capital? (WACC, opportunity cost of capital)

(10.53%, 11.14%)

(10.99%, 11.36%)

(11.32%, 12.13%)

(11.84%, 12.46%)

(12.45%,13.79%)

4. The beta of an all-equity firm is 1.44. Suppose the firm changes its capital structure to 32 percent debt and 68 percent equity using 9 percent debt financing. What is the equity beta of the levered firm? The beta of debt is 0.80. (Assume no taxes.)

1.54

1.93

1.89

1.67

1.71