Week 5 : Risk, Return, and the Capital Asset Pricing Model Quiz

These are the automatically computed

results of your exam. Grades for essay
questions, and comments from your
instructor, are in the "Details" section
below.
Question Type:

Date Taken:
Time Spent:
Points Received:

11/30/2014
16 min , 55 secs
20 / 20 (100%)

# Of Questions:

Essay

# Correct:

N/A

Question 1. 1. (TCO C) Company A has a beta of 2.77. Company B has a beta of .73. Company
C has a beta of .90. The risk free rate is 6% and the market risk premium is 4%. What is the
expected return of investing in Company B? Show your work. (Points : 5)
Student Answer:

Instructor
Explanation:

Points Received:

Expected Return Company B = 6% + 0.73(4%) = 6%

+2.92%=8.92%

.06+.73*.04=.0892=8.92%
Chapter 10

5 of 5

Comments:

Question 2. 2. (TCO C) Your stock portfolio consists of only two stocks. You have $30,000 in
Company A and $35,000 in Company B. Company A has an actual return of -8% and Company
B has a return of 12%. What is the return on your portfolio? Show your work. (Points : 5)

Student Answer:

Instructor
Explanation:

Return on Portfolio = (($30,000)(-.08) + ($35,000)(.12))/ $65,000 =

(-$2400 + $4200) / $65,000 =1800/650000=0.0277 or 2.77%

(30,000/65,000)(-0.08) + (35,000/65,000)(.12) = .0277 = 2.77%

Chapter 11

Points Received:

5 of 5

Comments:

Question 3. 3. (TCO E) A company has a capital structure of 40% debt and 60% equity. The
YTM on the companys bonds is 9%, and the companys effective tax rate is 40%. The CFO has
estimated the companys WACC to be 9.96%. What is the companys cost of equity? Show your
work. (Points : 10)

Student Answer:

Instructor
Explanation:

Points Received:

9.96% = (.4)(9%)(1 - 0.4) + (0.6)(Cost of Equity) 9.96% = 2.16%

+ (0.6)(Cost of Equity) 7.80% = 0.6 * Cost of Equity Cost of Equity
= 7.8 / 0.6 = 13%

9.96=.60*RE + .40*.09*(1-.40)
RE=13%
Chapter 12

10 of 10

Comments:

A company has a capital structure of 50% debt and 50% equity. The
YTM on the companys bonds is 8%, and the companys effective tax
rate is 40%. The cost of equity is 13%. What is the companys WACC?
Show your work.

Company's WACC = 8.90%

WACC = [Cost of debt x (1-tax rate) x Weight of debt] + [Cost of equity x
Weight of equity)
WACC = [8% x (1-0.40) x 50%] + (13% x 50%)

WACC = 2.4% + 6.5%