Problem 1

Mass Inc. is trying to estimate its optimal capital structure. Right now, Mass Inc. has a capital structure that consists of 50 percent debt and 50 percent equity, based on market values. (Its D/S ratio is 1.00) The riskfree rate is 6 percent and the market risk premium, K M K RF, is 5 percent. Currently the company s cost of equity, which is based on the CAPM, is 12 percent and its tax rate is 40 percent. What would be Mass Inc. s estimated cost of equity if it were to change its capital structure to 60 percent debt and 40 percent equity?

Problem 2

23,104 32,562

Cost of goods sold

8,195 14,176

BALANCE SHEET COCA-COLA PEPSI

Assets

Cash and Cash Equivalents 4,701 1,716

Short-term Investments 66 3,166

Accounts Receivables 2,281 3,261

Inventory 1,424 1,693

Other Current Assets 1,778 618

Total Current Assets

10,250 10,454

Total Assets

29,427 31,727

Financed by: COCA-COLA PEPSI

Accounts Payable 5,290 5,357

Short-term debt 4,546 2,889

Other Current Liabilities 0 1,160

Total Current Liabilities

9,836 9,406