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The firm currently has 100 shares outstanding, selling at a market price of $5 per share and the bonds are selling at par. The firm's current beta is 1.12, and the six-month T.Bill rate is 7%.

a. What is the firm's current cost of equity?

b. What is the firm's current cost of debt?

c. What is the firm's current weighted average cost of capital?

Assume that management of Herbert's Inc. is considering doing a debt-equity swap (i.e. borrowing enough money to buy back 70 shares of stock at $5 per share). It is believed that this swap will lower the firm's rating to C and raise the interest rate on the company's debt to 15%.

d. What is the firm's new cost of equity?

e. What is the effective tax rate (for calculating the after-tax cost of debt) after the swap?

f. What is the firm's new cost of capital?

11. Terck Inc., a leading pharmaceutical company, currently has a balance sheet that is as follows:

Liability Assets

LT Bonds $1000 Fixed Assets

Equity $1000 Current Assets

Total $1000 Total

The firm's income statement looks as follows:

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