An unlevered firm has an asset market beta of 1.5. The risk-free
rate is 3%. The equity premium is
1. What is the firm’s cost of capital?
2. The firm refinances itself. It repurchases half of its stock with
debt that it issues. Assume that this debt is risk free. What is
the equity beta of the levered firm?
3. According to the CAPM, what rate of return does the firm
have to offer to its creditors?
4. According to the CAPM, what rate of return does the firm
have to offer to its levered equity holders?
5. Has the firm’s weighted average cost of capital improved