1. O’Connor Moving Co. is trying to estimate its optimal capital structure. Right now, O’Connor has a capital structure that consists of 80 percent debt and 20 percent equity, based on market values. The risk-free rate is 4 percent and the market risk premium is 8 percent. Currently the company’s cost of equity is 19 percent and its tax rate is 35 percent. What would be O’Connor’s estimated cost of equity if it were to change its capital structure to 50 percent debt and 50 percent equity?

10.9%

21.3%

8.2%

19%

2. A borrower requests a $150 loan from the bank. The borrower is type A with probability 0.35 and type B otherwise. Type A always repays but type B only repays with probability 0.7. If the bank cannot observe the borrower's type, what is the competitive interest rate the bank can offer?

24.3%

27.5%

31%

33.3%