a. When deciding the relative proportion of each component in the company's capital structure for the calculation of the WACC, do you use the book value or the market value of the funds? Why? (4 marks)

b. Describe the security market line and the dividend growth model approaches to determining the cost of equity for a firm. (4 marks)

c. Thorpe and Company is currently an all equity firm. It has 3 million shares selling for $28 per share. Its beta is 0.85 and the current risk-free rate is 2.5%. The expected return on the market for the coming year is 13%. Thorpe will sell corporate bonds for $28,000,000 and retire common stock with the proceeds. The bonds are twenty-year semiannual bonds with a 10% coupon rate and $1,000 par value. The bonds are currently selling for $1,143.08 per bond. When the bonds are sold, the beta of the company will increase to 0.95. What was WACC of Thorpe and Company before the bond sale? What is the adjusted WACC of Thorpe and Company after the bond sale if the corporate tax rate is 40%? Hint: The weight of equity before selling the bond is 100%. (8 marks)

d. Some of BioCom's projects are of low risk, some average risk, and some high risk.Should BioCom use the cost of capital to evaluate all of its projects, or adjust the discount rate to reflect different levels of risk? (4 marks)