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Chapter 11:
Question 7: Calculating Return and Standard Deviation State of Economy Depression Recession Normal Boom Expected Return ( Standard Deviation
( ) ( ) ( ) ( )

Probability of State of Economy 0.10 0.25 0.45 0.20

Rate of Return if State Occurs -0.045 0.044 0.120 0.207

Question 9: Returns and Standard Deviations Rate of Return if State Occurs Stock A Stock B Stock C 0.07 0.15 0.33 0.13 0.03 -0.06

State of Economy Boom Bust

Probability of State of Economy 0.8 0.2

a. The expected return on an equally weighted portfolio of these three stock

Hence, the expected return of the portfolio is: ( ) (

b. The variance of a portfolio invested 20 percent each in A and B, and 60 percent in C ( Hence, the expected return of the portfolio is: ( ) ( The variance of the portfolio is: ( ) ( ) ) ) ( )

[Type here] Question 16: Using CAPM E(Ri) = 16.2%; = 1.75; E(Rm) = 11%; What must the risk-free rate be? ( ) ( ( ) ) ( )( )

Question 27: Covariance and Correlation State of Economy Bear Normal Bull Expected Return ( ) ( ) ( ( ) ) ( ( ) ) ( ( ) ) Probability of State of Economy 0.30 0.50 0.20 Return on Stock J -0.020 0.138 0.218 Return on Stock K 0.034 0.062 0.092

Standard Deviation Covariance ( ) ( ( Correlation


( )

( (

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( (

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( (

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Chapter 13:
Question 12: WACC Target debt-equity ratio = 0.65 WACC = 11.2% Tax rate = 35% a. If Koses cost of equity is 15%, its pretax cost of debt is: ( ) ( )( )

b. The aftertax cost of debt is 6.4%, the cost of equity is: ( ) ( )

Question 13: Finding the WACC Assume the companys tax rate is 35%. Debt: Common stock: Market: 5,000 8% coupon bonds outstanding, $1,000 par value, 20 years to maturity, selling for 103% of par; the bonds make semiannual payments. 160,000 shares outstanding, selling for $57 per share; the beta is 1.10. 7% market risk premium and 6% risk-free rate.

The market values of bonds and equity are as follows: ( ( Total market value of company is: )( ) )

The cost of equity using CAPM is: ( The cost of debt is the YTM of the bonds: ( ) ( ) )

The aftertax cost of debt is: ( )( )

[Type here] The WACC is: ( ) ( )

Question 19 Debt: 40,000 bonds with a 7% coupon rate and a current price quote of 119.8; the bonds have 25 years of maturity. 150,000 zero coupon bonds with a price quote of 18.2 and 30 years until maturity. 100,000 shares of 4 percent preferred stock with a current price of $78, and a par value = $100 1,800,000 shares of common stock; the current price is $65, and the beta of the stock is 1.1 The corporate tax rate is 40%, the market risk premium is 7%, and the risk-free is 4%

Preferred stock: Common stock: Market:

The market values of normal bonds, zero bonds, preferred stock and common stock are as follows: ( ( ( ( The total market value of company is: )( )( ) ) ) )

The cost of equity using CAPM is: ( The cost of debt is the YTM of the bonds: ( ) ( Required return on preferred stock is: )( ) )

The WACC is:

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