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A firm has a debt-to-equity ratio of 2:1. The firms debt beta is 0.4. Five-year...

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Accounting

A firm has a debt-to-equity ratio of 2:1.

The firms debt beta is 0.4.

Five-year government bonds yield 5% pa with a coupon rate of 6% pa. The market's expected dividend return is 4% pa and its expected capital return is 6% pa.

The firm stocks next dividend is expected to be $2, paid one year from now. Dividends are expected to be paid annually and grow by 2% pa forever. The current stock price $10.

The corporate tax rate is 30%. Assume a classical tax system.

Which statement is NOT correct?

a.

The beta of the firm's equity is 3.4.

b.

The expected return on debt is 7% pa.

c.

The firms after-tax WACC is 10.6% pa.

d.

The beta of the firms assets is 1.4.

e.

The expected return on equity is 20% pa.

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