QUESTION 3 (a) Step 1-Degear Levered Proxy beta 1+0.25 0.92 Step 2-Regear Unlevered Proxy beta 0.921+0.7 1.61 (b) 0.06[1.6k(00 0.1566r15.66% kd=109giⅳa k2|+ka(.T) 0.15 +0.101-0 0.1196rl1.95%July 2003 QUESTION 3 (a) Step 1 - Degear Levered Proxy Beta 0 . 9 2 1 0 . 2 5 1 . 1 5 E D 1 b b p p LP UP = + =         + = Step 2 - Regear Unlevered Proxy Beta   = 1 .6 1 = 0 .9 21 + 0 .7 5 E D b = b 1 + j j j UP         (b)  ( )  ( ) = 0 .1 5 6 6o r 1 5 .6 6 % = 0 .0 6+ 1 .6 1 0 .0 6 k j = R F + b j k m - R F   k =10%(g iv en) d ( ) ( ) = 0 .1 1 9 5o r 1 1 .9 5 % = 0 .0 8 9 5+ 0 .0 3 7 3 + 0 .1 01 - 0 .3 7 4 = 0 .1 5 6 6 V D + k 1 - T V E k = k j j d j j j                            