$1.(12$ points$)$

Driver Corporation faces an IOS schedule calling for a capital budget of $\backslash (\backslash$$ $60\backslash )$ million. Its optimal capital structure is $\backslash (60\backslash \%\backslash )$ equity and $\backslash (40\backslash \%\backslash )$ debt. Its earnings before interest and taxes $($EBIT$)$ were $\backslash (\backslash$$ $98\backslash )$ million for the year. The firm has $\backslash (\backslash$$ $200\backslash )$ million in assets, pays an average of $\backslash (10\backslash \%\backslash )$ on all its debt, and faces a marginal tax rate of $34$ percent. If the firm maintains a residual dividend policy and will keep its optimal capital structure intact, what will its dividend payout be after financing its capital budget?

$2.(12$ points$)$

Why is it important for financial decision$-$makers to obtain a good estimate of the firm's cost of capital? What are the consequences of using a discount rate that is higher or lower than the firm's true required return?

$3.(10$ points$)$

Determine the increase or decrease in cash for Rinky Supply Company for last year, given the following information. Assume no other changes ocurred during the past year.

$4.(12$ points$)$

Aurillo Equipment Company $($AEC$)$ projected that its ROE for next year would be just $6\backslash \%.$ However, the financial staff has determined that the firm can increase its ROE by refinancing some high interest bonds currently outstanding. The firm's total debt will remain at $\backslash (\backslash$$ $200,000\backslash )$ and the debt ratio will hold constant at $\backslash (80\backslash \%\backslash ),$ but the interest rate on the refinanced debt will be $\backslash (10\backslash \%\backslash ).$ The rate on the old debt is $\backslash (14\backslash \%\backslash ).$ Refinancing will not affect sales which are projected to be $\backslash (\backslash$$ $300,000\backslash ).$ EBIT will be $\backslash (11\backslash \%\backslash )$ of sales, and the firm's tax rate is $\backslash (40\backslash \%\backslash ).$ If AEC refinances its high interest bonds, what will be its projected new ROE?

$5.(12$ points$)$

We routinely assume that investors are risk$-$averse return$-$seekers; i$.$e$.,$ they like returns and dislike risk. If so$,$ why do we contend that only systematic risk is important? Alternatively, why is total risk not important to investors?