Assignment
Part 1
1. • If a company's beta were to double, would its expected return double?
2. Portfolio Beta
• Your investment club has only two stocks in its portfolio. $20,000 is invested in a stock with a beta of 0.7, and $35,000 is invested in a stock with a beta of 1.3. What is the portfolio's beta?
3. Required Rate of Return
• AA Corporation's stock has a beta of 0.8. The risk-free rate is 4% and the expected return on the market is 12%. What is the required rate of return on AA's stock?
4. Required Rate of Return
• Suppose rRF=5%rRF=5%, rM=10%rM=10%, and rA=12%rA=12%.
a. Calculate Stock A's beta.
b. If Stock A's beta were 2.0, then what would be A's new required rate of return?
5. Portfolio Required Return
• Suppose you manage a $4 million fund that consists of four stocks with the following investments:
|
Stock
|
Investment
|
Beta
|
|
a
|
400000
|
1.5
|
|
b
|
600000
|
-0.5
|
|
c
|
1000000
|
1.25
|
|
d
|
2000000
|
0.75
|
If the market's required rate of return is 14% and the risk-free rate is 6%, what is the fund's required rate of return?
Part 2
1. After-Tax Cost of Debt
• LL Incorporated's currently outstanding 11% coupon bonds have a yield to maturity of 8%. LL believes it could issue new bonds at par that would provide a similar yield to maturity. If its marginal tax rate is 35%, what is LL's after-tax cost of debt?
2. Cost of Preferred Stock with Flotation Costs
• Burnwood Tech plans to issue some $60 par preferred stock with a 6% dividend. A similar stock is selling on the market for $70. Burnwood must pay flotation costs of 5% of the issue price. What is the cost of the preferred stock?
3. Cost of Equity: Dividend Growth
• Summerdahl Resort's common stock is currently trading at $36 a share. The stock is expected to pay a dividend of $3.00 a share at the end of the year (D1=$3.00)(D1=$3.00), and the dividend is expected to grow at a constant rate of 5% a year. What is its cost of common equity?
4. Cost of Equity: CAPM
• Booher Book Stores has a beta of 0.8. The yield on a 3-month T-bill is 4%, and the yield on a 10-year T-bond is 6%. The market risk premium is 5.5%, and the return on an average stock in the market last year was 15%. What is the estimated cost of common equity using the CAPM?
5. WACC
• Shi Import-Export's balance sheet shows $300 million in debt, $50 million in preferred stock, and $250 million in total common equity. Shi's tax rate is 40%, rd=6%rd=6%, rps=5.8%rps=5.8%, and rs=12%rs=12%. If Shi has a target capital structure of 30% debt, 5% preferred stock, and 65% common stock, what is its WACC?
Format your assignment according to the following formatting requirements:
1. The answer should be typed, double spaced, using Times New Roman font (size 12), with one-inch margins on all sides.
2. The response also include a cover page containing the title of the assignment, the student's name, the course title, and the date. The cover page is not included in the required page length.
3. Also Include a reference page. The Citations and references should follow APA format. The reference page is not included in the required page length.