The Star Company has a WACC of 20%. The cost of debt is 12%,
which is equal to the risk-free rate of interest. If Star’s debt to
equity ratio is 2, Star’s equity beta is 1.5.
What are the M&M propositions I, II and III, please use
graphs/charts and words to explain. (7marks)
Based on the M&M proposition II, what is the beta of the
entire firm? What is the cost of equity capital?