1. The approximate before-tax cost of debt for a 10-year, 8 percent, $1,000 par value bond selling at $1,150 is ______

A) 5.97 percent

B) 8.33 percent

C) 8.82 percent

D) 9 percent

2. Blue Berry (BB) will remain in business for one more year. At the end of next year, the firm will generate a liquidating cash flow of $230M in a boom year and $100M in a recession year; both states are equally likely. The firm’s outstanding debt matures in a year, has a market (and book) value of $100M and a yield to maturity of 15%. The cost of equity for the unlevered firm is rU = 10%. Corporate taxes is the only market imperfection.

If the present value of the interest tax shield is $1.4M, the value of the equity must be:

(A) $ 45.45M

(B) $ 48.00M

(C) $ 50.00M

(D) $ 51.40M