1) Given the following information, leverage will add how much value to the unle

ID: 2628869 • Letter: 1

Question

1) Given the following information, leverage will add how much value to the unlevered firm per dollar of debt?

Corporate tax rate: 34% Personal tax rate on income from bonds: 20% Personal tax rate on income from stocks: 50%

2) Which one of the following stocks is correctly priced if the risk-free rate of return is 3.6% and the market rate of return is 10.5%?

Stock Beta Expected Return

B 1.08 11.8%

C 1.69 15.3%

D .71 7.8%

E 1.45 12.3%

2) Which one of the following stocks is correctly priced if the risk-free rate of return is 3.6% and the market rate of return is 10.5%?

Stock Beta Expected Return

A .85 9.2%

1) Given the following information, leverage will add how much value to the unlevered firm per dollar of debt?

Corporate tax rate: 34% Personal tax rate on income from bonds: 20% Personal tax rate on income from stocks: 50%

[1 - ((1 - .34)(1 - .1))/(1 - .5)] = 1 - (.66*.9)/.5 = 1 - 1.188 = -.188

2) Which one of the following stocks is correctly priced if the risk-free rate of return is 3.6% and the market rate of return is 10.5%?

Stock Beta Expected Return

E(r)A = .036 + [.85 X (.105

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