1. A firm with a debt ratio of 0.6 and pays a corporate income tax rate of 40% has an asset beta of 1.2. What is its equity beta? Suppose a different firm has the same equity beta. What is its asset beta if its debt ratio is 0.5 and it pays an effective corporate income tax rate of 30%?
2. As part of its renovation project, a hotel with a cost of capital of 13% is choosing between two grades of carpet to install. Grade A costs $2.8K and must be replaced every nine years. Grade B costs $2.2K and must be replaced every six years. Which carpet should the hotel choose?