i) What is ESG? (3 points)

16. Figure 1 plots changes in prices (in the vertical axis) in respond to changes in the yield to maturity (the horizontal axis) for four coupon bonds with the following properties:i. maturity in 5 years, coupon rate 3%, and yield to maturity 1 5%;ii. maturity in 15 years, coupon rate 3%, and yield to maturity 15%;iii. maturity in 15 years, coupon rate 3%, and yield to maturity 9%; iv. maturity in 5 years, coupon rate 18%, and yield to maturity 15%. Please identify which properties are with Bonds A, B, C, and D in the graph. Note that scores are given only if you offer reasons alongside with the correct answer. (10 points)

(i)To estimate the cost of capital, you survey the capital market and find that the average beta is 2 for all-equity firm in the similar industry as your new business. Under the risk-free rate of 1% and the market-portfolio return of 7%, please compute the cost of capital for your business if you want to finance the project by equity only. (3 points)

(ii) Following the previous question, if your business will cost $100,000 to build, please compute its net present value. (3 points)

(iii) Now suppose you want to issue both debts and equities to finance the business. Specifically, you would like to maintain the debt-to-equity ratio equal to one. If the beta of debt is 0.5, compute the costs of capital of the business for this scenario. (3 points)

(iv) Following the previous questions, what are the values of debts and equities? (3 points)

(V) Following the previous questions, what is the value of interest tax shield? (3 points)

(i)Please compute the Tobin's Q for these two companies. (4 points)

(ii)Please employ the Du-Pont identity to compare the performance of these two companies, and comment on their differences. (6 points)

ii) Provide each example for firm's investment in E and S respectively. (4 points)

iii) Provide one argument for why investment in ESG could be bad for the firmn.(4 points)

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