The following assumptions will be made:

The marginal tax rate (Tc ) is 40%.

The market risk premium is 5%.

Two approaches will be used to estimate the weighted average cost of capital:

Prevailing consolidated.

Target consolidated.

The target consolidated debt-to-value ratio, set in consultation among division and corporate executives and the board, is 32.2% (this is the proportion of net debt to enterprise value). The prevailing consolidated debt-to-value ratio is arrived at using the following data:

Current stock price: $44.11

Shares outstanding (millions): 2,950.6

Exercisable options (millions): 396.5

Weighted average strike price: $34.12

Total debt ($million) $101,845

Cash and equivalents ($million): $22,337

Enterprise value ($million): $213,620 5

Please help me from d to h

d. [4] Derive an estimate of r, based on the target consolidated debt-to-value ratio using the CAPM and the formulas below: BE By = [1 + (1 -Tc)(DIE)] Bi = [1 + (1 -T.)(D/E)]*B Let rs = 2.8%, the 30-year U.S. Treasury bond yield. Be = 1.25 is given. Be = 1.25 is based on the prevailing consolidated debt-to-value ratio. To determine an appropriate estimate of equity beta based on the target capital structure, unlever Be = 1.25 and then relever (reminder: use the formulas above). 2 e. [1] What are two key assumptions that one needs to make when using these specific formulas? Are these the best formulas to use in this case? f. [1] To estimate ro, use the Treasury spread approach, that is, assume that Aspen's spread over 30-year Treasuries is 1.62%. In other words, let r, equal the current 30-year U.S. Treasury bond yield, 2.8%, plus the assumed spread. What is your estimate of r? g. [1] Derive an estimate of rwacc based on the target consolidated debt-to-value ratio. h. [2] Would your answer be different if you had relied on the prevailing consolidated debt-to-value ratio when you calculated r and rwacc instead of the target consolidated debt-to-value ratio? How? (Hint: Would using the prevailing consolidated debt-to-value ratio make r, higher or lower? Would using the prevailing consolidated debt-to-value ratio make 'wacc higher or lower?) d. [4] Derive an estimate of r, based on the target consolidated debt-to-value ratio using the CAPM and the formulas below: BE By = [1 + (1 -Tc)(DIE)] Bi = [1 + (1 -T.)(D/E)]*B Let rs = 2.8%, the 30-year U.S. Treasury bond yield. Be = 1.25 is given. Be = 1.25 is based on the prevailing consolidated debt-to-value ratio. To determine an appropriate estimate of equity beta based on the target capital structure, unlever Be = 1.25 and then relever (reminder: use the formulas above). 2 e. [1] What are two key assumptions that one needs to make when using these specific formulas? Are these the best formulas to use in this case? f. [1] To estimate ro, use the Treasury spread approach, that is, assume that Aspen's spread over 30-year Treasuries is 1.62%. In other words, let r, equal the current 30-year U.S. Treasury bond yield, 2.8%, plus the assumed spread. What is your estimate of r? g. [1] Derive an estimate of rwacc based on the target consolidated debt-to-value ratio. h. [2] Would your answer be different if you had relied on the prevailing consolidated debt-to-value ratio when you calculated r and rwacc instead of the target consolidated debt-to-value ratio? How? (Hint: Would using the prevailing consolidated debt-to-value ratio make r, higher or lower? Would using the prevailing consolidated debt-to-value ratio make 'wacc higher or lower?)