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Johnson Company is financed by a mixture of debt and equity. You have the following information about its cost of capital: rD= 12%, rf= 10%, rm= 18%, beta E= 1.5, D/V= 0.5. We apply MM's assumptions and no taxes. (1) Compute rE by CAPM (or SML). 22% (2) Compute beta D by CAPM (or SML) because theoretically every security should locates on SML. 0.25 (3) Compute rA by WACC. 17% (4) Compute beta A as the weighted average of beta D and beta E. 0.875 Continue from the previous question. Suppose now that Johnson Company repurchases debt and issues equity so that D/V= 0.3. The reduced borrowing causes rD to fall to 11%. What is rA and beta A now? Compute rE, beta D, and beta E again. Johnson Company is financed by a mixture of debt and equity. You have the following information about its cost of capital: rD= 12%, rf= 10%, rm= 18%, beta E= 1.5, D/V= 0.5. We apply MM's assumptions and no taxes. (1) Compute rE by CAPM (or SML). 22% (2) Compute beta D by CAPM (or SML) because theoretically every security should locates on SML. 0.25 (3) Compute rA by WACC. 17% (4) Compute beta A as the weighted average of beta D and beta E. 0.875 Continue from the previous question. Suppose now that Johnson Company repurchases debt and issues equity so that D/V= 0.3. The reduced borrowing causes rD to fall to 11%. What is rA and beta A now? Compute rE, beta D, and beta E again

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