Question 1
The AI corporation has a $150 M worth of common stock on which investors require a 17% rate of return. It also has $35 M in bonds that offer a 7% return.
a)	Compute the WACC assuming that AI is subject to a 40% tax rate. 

b)	Re-compute the WACC assuming that the firm has $85 M in debt and $100 M in stock. 

c)	Explain why the WACC computed in b) may not be the correct answer if the capital structure changes. 

Question 2 
Look at the Microsoft Excel file.
In this file you will find the price of 2 stocks, ATR and FUL. In the same spreadsheet you will also find data for the S&P500 index – all the data are from the NYSE.
a)	For each stock and for the market compute the daily rate of return  where Pi,t is the price of stock i at time t. Then estimate the CAPM-b for ATR and FUL. 

b)	Explain the “nature” of the b you estimated. 

c)	Assume that the risk free rate is 5%. Further assume that the expected return for the market is 11%. What is cost of equity for ATR and FUL? 

d)	Assume that ATR and FUL have a capital structure composed only of equity. What is the WACC of ATR and FUL? 

e)	ATR is a well-diversified company and FUL is a specialized company – i.e. ATR invests and operates in several sectors while FUL invests and operates only in a sector. Assume you did not compute CAPM-bs and WACC, in your opinion, which company should be riskier? Does your estimate confirm your intuition?