Chapter 13 Return, Risk, and Security Market Line Chapter 14 Cost of Capital All returns are annual returns unless otherwise indicated.

1. What is the expected return on Asset A if it has a beta of 1.40, the expected market return is 12 percent, and the risk free rate is 5 percent? 2. The expected return on Stock Q is 14 percent, the market risk premium is 6 percent, and the risk free rate is 5 percent. Calculate the beta of Stock Q. 3. Assume that you have a portfolio consisting of the following stocks. _______________________________________________________ Stock Investment ($) Expected return _______________________________________________________ A $15,000 0.07 (or 7%) B 20,000 0.09 (or 9%) C 50,000 0.13 (or 13%) D 10,000 0.05 (or 5%) E 5,000 0.03 (or 3%) _________________________________________________________ Compute the expected return on the portfolio. 4. You invest $200,000 in Stock X, $300,000 in Stock Y, and $500,000 in Stock Z. a) The betas for Stocks X, Y, and Z are 0.90, 1.20, and 1.70, respectively. Find the beta of the portfolio. b) The risk free rate of return is 5 percent and the return on the market portfolio is 11 percent. Find the expected return on the portfolio according to the Capital Asset Pricing Model (CAPM)?

5. A firm just paid an annual dividend of $2 per share. This dividend is expected to grow at a rate of 5 percent per year forever. If the current market price for a share of the companys stock is $50, find the cost of equity.

6. Treasury bills currently have a return of 5 percent and the return on the S&P 500 is 12 percent. If a company has a beta of 1.50, what is its required rate of return on equity (or cost of equity)?

7. Suppose a firms capital structure consists of debt and common equity. The firm has a cost of equity of 15 percent and a pre-tax cost of debt of 8 percent. If the target debt/equity ratio is 0.60 (or 60 percent), and the tax rate is 25 percent, what is the firms weighted average cost of capital (WACC or R_WACC)?