Assignment
4
1) A stock has an expected return of 11 percent, the risk-free
rate is 5.2 percent, and the market risk premium is 5 percent. What is the
stock’s beta? (5 pts)
2) You own a portfolio equally invested in a risk-free asset and
two stocks. One of the stocks has a beta of 1.9 and the total portfolio is
equally as risky as the market. What is the beta of the second stock? (5
pts)
3)Cookie
Dough Manufacturing has a target debt-equity ratio of 0.5. Its cost of equity
is 15 percent, and its cost of debt is 11 percent. What is the firm’s WACC
given a tax rate of 31 percent? (8 pts)
4)Electronics
Galore has 950,000 shares of common stock outstanding at a market price of $38
a share. The company also has 40,000 bonds outstanding that are quoted at 106
percent of face value. What weight should be given to the debt when the firm
computes its weighted average cost of capital? What is debt-to equity
ratio? (12 pts)
5) Travis & Sons has a capital structure which is based on 45
percent debt, and 55 percent common stock. The pre-tax cost of debt is 7.5
percent, and the cost of common stock is 13 percent. The company’s tax rate is
39 percent. The company is considering a project that is equally as risky as
the overall firm. This project has initial costs of $325,000 and annual cash
inflows of $87,000, $279,000, and $116,000 over the next three years,
respectively. What is the projected net present value of this project? Hint: First calculate the weighted average
cost of capital (WACC) and then use this rate as the discount rate to calculate
the NPV of the project (10 pts)
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