XYZ industry owns assets that will have 80% probability of market value of $50 million in one year. There is 20% chance that the asset will be worth only $20 million. XYZ has $10 million worth of debt due in one year with a yield to maturity of 7%. Some other rates are:1) risk-free rate is 6%; 2) market risk premium is 8%; 3) cost of capital is 10%; and 4) tax rate is 40%.

(a) What is the value of XYZ’s equity?  

 

(b) What is the expected return of XYZ’s equity with leverage?  

  

(c) What is the expected WACC for XYZ industry if the beta is 1.2?

  

(d) If XYZ has a price of $30 common stock and will issue a dividend of $3 next year. Under CDGM, at what rate to expect XYZ’s dividend to grow to get the same equity cost of capital as in part (c)?