6.1 - Your investment club has only 2 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?
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20,000 + 35,000 = 55,00020,000 / 50,000 = 36.36%35,000 / 50,000 = 63.63%0.3636(0.7) + 0.6363(1.3) = 1.08
6.2 - AA Industries 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 return on AA"s stock?
6.3 - Suppose that the risk-free rate is 5% and the market risk premium is 7%. What is the required return on (1) The market? (2) A stock with a Beta of 1.0? (3) A stock with a Beta of 1.7?
(1) Market risk premium is 8%(2) Expected return on the market is 11%Rf rate = 1%Set up 2 different calculations
6.5 - A stock has the following returns:Probability of occurring Rate of Return if this demand occurs 0.1 -50% 0.2 -5% 0.4 16% 0.2 25% 0.1 60%Calculate the stock"s expected return and SD
6.6 - The market and stock J have the following distributions:Probability rm rj 0.3 15% 20% 0.4 9% 5% 0.3 18% 12%b. Calculate the expected rates of return for the market and stock Jc. Calculate the SD for the market and stock J
6.7 - Suppose rRF = 5% rM = 10% and rA = 12%a. Calculate stock A"s Betab. If stock A"s Beta were 2.0, then what would be A"s new required rate of return?
6.8 - As an equity analyst you are concerned with what will happen to the required return of Universal Toddler Industries"s stock as market conditions change. Suppose rRF = 5% rM = 12% and Beta = 1.4a. Under current conditions, what is the required rate of return on UTI stock?b. Now suppose rRF (1) increases to 6% or (2) decreases to 4%. The slope of the SML remains constant. How would this affect RM and required rate of returnc. Now assume the rRF remains at 5% but rM (1) increases to 14% or (2) falls to 11%. The slope of the SML does NOT remain constant. How would this affect the required rate of return (rupi)
6.10 - Suppose you manage a $4 million fund that consists of four stocks with the following investments:Stock Investment Beta A $400,000 1.5 B $600,000 -0.5 C $1,000,000 1.25 D $2,000,000 0.75If 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?
6.13 - You are considering an investment in either individual stocks or a portfolio of stocks. The 2 stocks you"re researching, stocks A and B, have the following historical returns: Year TA TB 2009 -20% -5% 2010 42% 15% 2011 20% -13% 2012 -8% 50% 2013 25% 12%a. Calculate the average rate of return for each stock during the 5-year period. b. Suppose you held a portfolio consisting of 50% stock A and 50% stock B. What would have been the realized rate of return on the portfolio in each year? What would have been the average rate of return on the portfolio during this period?c. Calculate the SD of returns for each stock and for the portfoliod. If you are a risk-averse investor, then, assuming these are your only choices, would you prefer to hold Stock A, Stock B, or the portfolio? Why?
a. rA = 11.8% rB = 11.8%b. rp = 11.8%c. SDA = 25.3% SDB = 24.3% SDP = 16.3%d. Probably the portfolio??? *
9.1 - Calculate the after-tax cost of debt under each of the following conditions:a. rD of 13%, tax rate of 0%b. rD of 13%, tax rate of 20%c. rD of 13%, tax rate of 35%
9.5 - 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), and the dividend is expected to grow at a constant rate of 5% a year. What is the cost of common equity?
9.6 - 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 CAPM?
9.7 - Shi Importer"s balance sheet shows $300 Million in debt, $50 Million in preferred stock, and $350 Million in total common equity. Shi"s tax rate is 40%, rD = 6% rPS = 5.8% and rS = 12%. If Shi has a target capital structure of 30% debt, 5% preferred stock, and 65% common stock, what is its WACC?
9.8 - David Ortiz motor"s has a target capital structure of 40% debt and 60% equity. The YTM on the company"s outstanding bonds is 9%, and the company"s tax rate is 40%. Ortiz"s CFO has calculated the company"s WACC as 9.96% What is the company"s cost of equity capital?
9.15 - On January 1st, the total market valuation of Tysseland Company was $60 million. During the year, the company plans to raise and invest $30 million in new projects. The firm"s present market value capital structure, shown below, is considered to be optimal. There"s NO short-term debt. Debt $30,000,000Common Equity $30,000,000 --------------Total Capital 60,000,000New bonds will have an 8% coupon rate, and they will be sold at par. Common stock is currently selling at $30 per share. The stockholder"s required rate of return is estimated to be 12%, consisting of a dividend yield of 4% and an expected constant growth rate of 8% (The next dividend is $1.20 so the dividend yield is $1.20/$30 = 4%) The marginal tax rate is 40%a. In order to maintain the present capital structure, how much of the new investment must be financed by common equity?b. Assuming there is sufficient cash flow for Tysseland to maintain it starget capital structure without issuing additional shares of equity, what is its WACC?
15.2 - Counts accounting has a beta of 1.5 the tax rate is 40%, and Counts is fnanced with 20% debt. What is count"s unlevered Beta?
15.3 - Ether enterprise has an unlevered Beta of 1.0 Ethier is financed with 50% debt and has a levered beta of 1.6. If the risk-free rate is 5.5% and the market risk premium is 6%, how much is the additional premium that Ethier"s shareholders require to be compensated for financial risk?
15.4 - Nichols Corporation"s value of operations is equal to $500 million after a recapitalization (the firm had no debt before the recap). It raised $200 million in new debt and used this to buy back stock. Nichols had no short-term investments before or after the recap. After the recap, wd = 40%. What is the S (the value of equity after the recap)?
15.5 - Lee Manufacturing"s value of operations is equal to $900 million after a recapitalization (the firm had no debt before the recap). Lee raised $300 million in new debt and used this to buy back stock. Lee had no short-term investments before or after the recap. After the recap, wf = 1/3. The firm has 30 million shares before the recap. What is the P (the stock price after the recap)
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15.6 - Dye Trucking raised $150 million in new debt and used this to buy back stock. After the recap, Dye"s stock price is $7.50. If Dye had 60 million shares of stock before the recap, how many shares does it have after the recap?