$(10$ points$)$

a$.$ What is the underlying assumption for setting a single objective of value maximization

for a firm?

b$.$ Is value maximization a proper objective that benefits society as a whole or a flawed

one? How do the agency theory's and the stakeholder theory's answers to this question

differ?

c$.$ Can the modern fim have multiple objectives? If so$,$ what is the critical information

needed for achieving the goals of the firm? If not, why?

d$.$ Please discuss the approaches of the agency theory and the stakeholder theory to the

modern firm's objective$($s$)$ in light of the increased focus on ESG and CSR$.$

$(15$ points$)$ You obtain the consensus expectations for two stocks $($ABC and XYZ$)$ as

given below for the next year.

a$.$ You decide to hold $40\%$ of your portfolio in ABC stock and allocate the remaining

amount to XYZ stock. What is the expected return and standard deviation of your

portfolio?

b$.$ What are the coefficients of variation for ABC,$xYZ,$ and your portfolio? Please

elaborate on the differences in the coefficients of variation regarding the uncertainty of

expected returns.

c$.$ ABC and $xYZ$ have debt$-$to$-$value ratios of $0\mathrm{.}2$ and $0\mathrm{.}8,$ respectively. The before$-$tax

cost of debt for ABC is $5\%.$ The corporate tax rate for both firms is $30\%,$ and the two

firms are identical except for their capital structure. What is the implied cost of debt

for XYZ$?$ What are the WACCs for the two firms?

$(10$ points$)$ For the propositions below, provide your answers as true or false followed by

a brief reasoning of your answer.

a$.$ Other things being equal, the higher the marginal tax rate of a business, the more debt

it will have in its capital structure.

b$.$ Firms with more volatile earnings and cash flows will have higher probabilities of

bankruptcy at any given level of debt and for any given level of earnings.

c$.$ Other things being equal, the greater the agency problems associated with lending to a

firm, the less debt the firm can afford to use.

d$.$ Other things remaining equal, the more uncertain a firm is about its future financing

requirements and projects, the less debt the firm will use for financing current projects.

$(15$ points$)$ AGE Corporation's cost of equity capital is $16\%$ whereas the before$-$tax cost

of debt is $8\%,$ and the WACC is $12\mathrm{.}4\%.$

a$.$ If the corporate tax rate is $35\%,$ what is the debt$-$to$-$equity ratio for the firm?

b$.$ What is the company's unlevered cost of equity capital?