. We are in a world of no corporate taxes. Markets in finance and investments are efficient. The risk-free rate of interest is 2.5% and the expected equity premium is 4%. In the competitive market for Electrical Equipment, all companies operate extremely efficiently. One such company is Safe Electrics (SE). They are currently an all equity company. Suppose the firm is currently valued at $10,000,000, which is the value of its operating assets. It has an expected return on operating assets of 6%. It doesn't pay any dividends. Assume there are no corporate taxes (in part A and B). (a) What is the expected earnings of SE during the next year (year 1)? If there are 500,000 shares in SE then what is the expected price per share at the end of year 1? (10 marks) (b) Suppose an investor wishes to generate a higher expected return than that offered by SE. Demonstrate how the investor could increase their expected return to 7.75% by borrowing money themselves. Illustrate for an investor who (at end of year 1) holds 1,000 shares in SE and has no borrowing. What level of homemade leverage is required for them to do this? (20 marks) (c) "In a world with corporate taxes, firms should aim to take on as much debt as possible in order to maximise the value of tax shields." To what extent do you agree with this statement? (20 marks) Total: 50 marks)