Chapter 11 1. Interpret (explain) the following graph. Explain why each curve has its particular shape in relation to the x and y axis and to each of the other curves. 2. Using the Capital Assets Pricing Model (CAPM), assume R* = 6% and Km = 10%, Compute Ki for the following betas: a. 0.7 b. 1.4 1.7 C. Cost of capital (percent) Cost of equity Weighted average cost of capital U-shaped 3. Using the betas and required rates of return computed in Question 2, draw and interpret (explain) the Security Market Line. Cost of debt Minimum point for cost of capital 0 80 40 Debt-assets ratio (percent)