Problem 1. LipTea Incorporated purchases raw materials and has processing plants around the world.
The standard deviation of the firmâ s equity returns is 1.2 times as great as the marketâ s standard deviation of returns. If the correlation of LipTea's returns with the marketâ s is 0.80, what is the systematic risk of the firm?
A. 1.20
B. 0.96
C. 1.50
D. There is not enough information to answer this question.
Problem 2. Ready Supply Co. has a cost of debt of 8%. The risk-free rate of interest is 3% and the expected return on the market portfolio is 10%. If the firm has a beta of 0.90 and an effective tax rate of 30% with a capital structure that is 40% debt and 60% equity, what is the firm's weighted average cost of capital?
A. 9.30%
B. 7.82%
C. 8.00%
D. 5.60%
Problem 3. Seine River Insurance Company plans to issue $5,000,000 of Euro-commercial paper with a 90-day maturity discounted to yield 4.00% per annum. What will be the immediate proceeds to Seine River Insurance?
A. euro 4,807,692
B. $4,950,495
C. $4,807,692
D. $5,000,000
Problem 4. TropiKana Inc., a U.S firm, has just borrowed euro 1,000,000 to make improvements to an Italian fruit plantation and processing plant. If the interest rate is 5.50% per year and the Euro appreciates against the dollar from $1.40/euro at the time the loan was made to $1.45/euro at the end of the first year, how much interest will TropiKana pay at the end of the first year (rounded)?
A. $37,931
B. $79,750
C. $55,000
D. $77,000