The company Youphone is expected to generate $48 million in FCFF next year. The firm currently is extremely over-levered with a debt to equity ratio of 4:1. The beta of the stock is now 2.72 and the pre-tax cost of debt is 12%. The marginal tax rate is 40%, the risk free rate is 4% and the market risk premium is 6%. You believe that new management can turn the firm around by restructuring the firms financing mix, to make it 50% debt and 50% equity. That will reduce the pre-tax cost of debt to 8%. The firm is expected to have a 2% perpetual growth rate.

Question 4.1: The unlevered beta of the company is:

	a.	1.84
	b.	0.8
	c.	2.35
	d.	1.7
	e.	None of the other answers.

(See Question 4 for background information.)

With the new financial structure (50% debt and 50% equity), estimate the new beta for the company.

	a.	1.04
	b.	1.12
	c.	1.28
	d.	2.57
	e.	None of the other answers.

(Please refer to Question 4 for background information.)

What would be the new cost of equity under the new financial structure?

	a.	19.44%
	b.	6.24%
	c.	11.68%
	d.	10.24%
	e.	None of the other answers.

(Please refer to Question 4 for background information.)

What would be the new cost of capital under the new financial structure?

	a.	7.52%
	b.	9.12%
	c.	9.44%
	d.	8.24%
	e.	None of the other answers.

(Please refer to Question 4 for background information.)

What would the value of the firm be under the new financial structure?

	a.	869.56
	b.	769.23
	c.	674.15
	d.	645.16
	e.	None of the other answers.