1. A firm requires an investment of $40,000 and borrows $20,000 at 9%. If the return on equity is 19%, what is the firm's pretax WACC?
A) 7%
B) 14%
C) 19.6%
D) 16.8%
2. Consider two firms, Firm X and Firm Y, that have identical assets that generate identical cash flows. Firm Y is an all-equity firm, with 1 million shares outstanding that trade for a price of $24 per share. Firm X has 2 million shares outstanding and $12 million in debt at an interest rate of 5%. According to MM Proposition I, the stock price for Firm X is closest to ________.
A) $6.00
B) $8.00
C) $24.00
D) $12.00