Which of the following would NOT cause the cost of a firm's debt to increase? Group of answer choices The stock market goes down. A credit downgrade. The firm becomes the subject of a significant lawsuit. The economy enters recession.

OceanGate sells external hard drives for $173 each. Its totalfixed costs are $26 million, and its variable costs per unit are$121. The corporate tax rate is 47%. If the economy is strong, thefirm will sell 8 million drives, but if there is a recession, itwill sell only half as many.

a. What will be the percentage decline in salesif the economy enters a recession?

b. What will be the percentage decline inprofits if the economy enters a recession?

c. Calculate the operating leverage of thisfirm?

A firm with a normalized pretax income of $40 million, 25% tax rate, and a Total Debt/Total Capital ratio of 30%, decides to undertake a capital expansion financed by new debt. The new level of debt will raise the Total Debt/Total Capital ratio to 40% (5-percentage points above its industry average). As a result, the firm’s credit rating is downgraded by a full level (say for example, from A to B) despite being secured by specific assets. This credit downgrade raises the firm’s Weighted Average Cost of Capital (aka Required Rate of Return) from 10% to 11.5%

What is the value of the firm prior to the downgraded credit rating?

Assuming the firm’s capital expansion program will lead to a 20% increase in normalized pretax income what is the firm’s value in the aftermath of the credit downgrade?

1. What does Beta (β) measure and reflect?

2. Consider the following: A firm’s operations are 45% GREATER than an average firm in the market. Relevant government securities trade @ 3.7%; and the current average return on the market as a whole is 9.1%. What rate of return must the firm pay to attract investors?

3. How does your answer to 2. above change if the company’s operations stabilize and its risk relative to the market goes down to 110%; AND the expected return on the market GOES DOWN to 7.9%?

4. Consider the following information:

State of Prob of State Rate of Return if State Occurs

Economy of Economy Stock A Stock B Stock C

Boom .35 .07 .15 .33

Bust .65 .13 .03 -.06

What is and expected return and variance of a portfolio which is equally weighted in investments of each of the three stocks?