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QUESTION 1: The following table lists possible rates of returns together with the respective probabilities on ABC Inc. stock and on the market (M). a. List the possible values for RABC and the probabilities that correspond to those values. Compute the expected value, variance, and standard deviation for RABC. b. List the possible values for RM and the probabilities that correspond to those values. Compute the expected value, variance, and standard deviation for RM. c. Calculate the covariance, and coefficient of correlation of RABC and RM. d. Calculate the beta for RABC. e. Determine the risk free rate of return. f. ABC is considering a project that will require an investment of $5,000,000 and will provide before tax cash flows of $2,000,000 one year from today, thereafter declining at 10% per year in perpetuity. ABC has a target Debt/Equity ratio of 1.5 . It can issue bonds at par value with a coupon rate of 8%. It can also increase the use of accounts payable to finance the project. ABC assigns accounts payable same cost as the overall rwACc. It has a target accounts payable/(debt-accounts payable) ratio of 0.40 . ABC has a 30% tax rate. Determine the rwACc, and the project's NPV. QUESTION 2: AllEquity Limited an all equity firm, pays no corporate taxes. It has 1,000,000 shares outstanding which are trading at $100 each. Mr. NoMoney and Ms. MoneyTree are shareholders of AllEquityLimited. AllEquity, NoMoney and MoneyTree can borrow and lend money at 6%. NoMoney has a personal tax rate of 30% and MoneyTree of 25% on both equity income and debt income. The value of their holdings and their overall borrowing and lending positions are given below: AllEquity desires a debt/equity ratio of 3/5. To meet this desire the firm issued debt and used the proceeds to repurchase the shares. Show the value of each shareholder's holding, borrowing and lending positions, and the $ return before and after the change in capital structure. Show how each one of them can obtain the same $ return after the change in capital structure as obtained before the change. You can use E to indicate AllEquity's earnings before interest and taxes

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