1. Stock A has a beta of 0.7, whereas Stock B has a beta of 1.3. Portfolio P has 50% invested in both A and B. Which of the following would occur if the market risk premium increased by 1% but the risk-free rate remained constant?
a. The required return for Stock A would fall, but the required return for Stock B would increase.
b. The required return on Portfolio P would remain unchanged.
c. The required return on both stocks would increase by 1%.
d. The required return on Portfolio P would increase by 1%.
e. The required return on Stock A would increase by more than 1%, while the return on Stock B would increase by less than 1%.
2. Given an unlevered beta of 1.30 and a corporate tax rate of 28.0%, what is a good estimate for your company's stock beta if your capital structure is 60.0% debt and 40.0% equity?
a) about 2.70
b) about 2.36
c) about 1.40
3. If a project has an initial outlay of $37,000 and cash flows of $13,000 per year for the next 5 years, what is the IRR of this project? (Answer to the nearest tenth of a percent, e.g. 12.3).