tars Inc. is considering changing its capital structure, by issuing additional bonds and using the proceeds to repurchase and retire some common stock at book value. The CFO has gathered the following data:

1. Complete the following statement: Beta unlevered is ______ than ______ by _______ *

6 points

a. Lower, the current beta levered; 0.11.

b. Higher, the new beta levered; 1.08.

c. Lower, the new beta levered; 0.48.

d. Higher, the current beta levered; 0.37.

e. None of the above

2. Which of the following statements is CORRECT? *

4 points

a. The old cost of equity is equal to 11.88%, it is higher than the new cost of equity by 1.73%.

b. The old cost of equity is equal to 13.61%, it is lower than the new cost of equity by 1.73%.

c. The old cost of equity is equal to 11.88%, it is lower than the new cost of equity by 1.73%.

d. The new cost of equity is equal to 13.61%, it is lower than the old cost of equity by 1.73%.

e. None of the above

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5% 35% Risk free rate Market risk premium 8% Tax rate Debt ratio at t=0 Equity ratio at E1 40% Beta att 0 0.86 45%