Tauck Inc.s current stock price is $2 per share and it has 300 million shares outstanding. The book value of its equity is $200 million and the book value of its debt is $400 million. Assume that the beta of the firms debt is 0.5 and the beta of the firms equity is 1.5. The risk-free rate is 3% and the expected return on the market is 9%. Assume that there are no taxes or other market imperfections.

5. (e) What is Taucks asset beta? What is Taucks asset cost of capital? (4 pts)

6. (f) Assume that Tauck Inc. issues an additional $100 million in debt and uses the proceeds to buy back its equity. What is Taucks asset beta after recapitalization? What is Taucks asset

   cost of capital after recapitalization? (2 pts)

7. (g) After the recapitalization described in part (b), Taucks debt beta is now 0.6. What is

   Taucks equity beta after recapitalization? What is Taucks cost of equity after

   recapitalization? (4 pts)

8. (h) From the standpoint of Tauck Inc. (i.e., the firm as a whole), what is the net present value

   (NPV) of the above-mentioned recapitalization? (2 pts)