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Nero Violins has the following capital structure:
Security Beta Total Market Value ($ millions)
Debt 0 $100
Pref Stock .20 40
Common Stock 1.20 299
a. What is the firm's asset beta? (Hint: What is the beta of a portfolio of all the firm's securities?) (Do not round intermediate calculations. Round your answer to 3 decimal places.)
b. Assume that the CAPM is correct. What discount rate should Nero set for investments that expand the scale of its operations without changing its asset beta? Assume a risk-free interest rate of 5% and a market risk premium of 6%. (Do not round intermediate calculations. Round your answer to 3 decimal places.) Discount rate %
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Companies U and L are identical in every respect except that U is unlevered while L has $10 million of 4.6% bonds outstanding. Assume that (1) all of the MM assumptions are met, (2) there are no corporate or personal taxes, (3) EBIT is $1.7 million, ..
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