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Answer each of the following questions in the space provided below the questions. Mark allocations are noted next to each question.

Question 1 (total of 11 marks): Data about a company and the financial markets are given below. All rates are effective annual rates. Assume a classical tax system.

• The company has 1 million shares.
• The firms earnings were $2 million last year and the equity trades at a 15 times price-to-earnings ratio(backward-looking).
• The beta of the companys equity is 1.25.
• The company is also funded by 0.5 million 3-year bonds which it just issued. Each has a $100 face value, a 4% pa yield to maturity and a 4% pa coupon rate, paid annually.
• The corporate tax rate is 30%.
• 10 year government bonds yield 2% pa and pay coupons of 1% pa.
• The market risk premium (MRP) is 6% pa.

Provide all answers as decimals rounded to at least 6 decimal places.

Question 1a (4 marks): Calculate the firms required return on equity (rE). Give your answer as a decimal thats correct to 6 decimal places or more. So for example if your answer is 1.23456789%, you can write 0.0123456789.

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Question 1b (4 marks): Calculate the firms debt-to-assets ratio. Give your answer as a decimal thats correct to 6 decimal places or more. So for example if your answer is 1.23456789%, you can write 0.0123456789.

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Question 1c (3 marks): Calculate the companys after-tax WACC. Give your answer as a decimal thats correct to 6 decimal places or more. So for example if your answer is 1.23456789%, you can write 0.0123456789.

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