solution

ABC software is trying to establish its optimal capital structure. It currently has 25% debt and 75% equity.
However, the firm CEO believes that the firm should use more debt. The risk-free rate is 3% and the market risk premium is 5%.
The firm’s tax rate is 25% and the cost of equity is 12%, as determined by the CAPM.
Assume that the firm changed its capital structure to 40% debt and 60% equity.

How much should be the new cost of equity for this company?
Enter your answer in the following format: 0.1234;

Hint #1: Answer is between 0.1214 and 0.1601

7)

ABC software is trying to establish its optimal capital structure. It currently has 25% debt and 75% equity.
However, the firm CEO believes that the firm should use more debt. The risk-free rate is 3% and the market risk premium is 5%.
The firm’s tax rate is 25% and the cost of equity is 12%, as determined by the CAPM.
Assume that the firm changed its capital structure to 40% debt and 60% equity.

How much should be the firm’s unlevered stock beta?
Enter your answer in the following format: 1,234;

Hint #1: Answer is between 1.22 and 1.63

8)

Suppose you are buying a house for $500,000 with 20% downpayment. The remaining 80% is financed with a loan.
Your bank is offering an interest-only loan (as shown in the video) for 4.5% annual rate.

If the house value falls to $485,000 one year after your purchased, How much is the return on your investment?
Enter your answer in the following format: -0.1234;

Hint #1: Answer is between -0.2838 and -0.3795