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4. Explain what a rm's standard deviation of returns and equity beta are. Describe the two forms of risk (systematic and nonsystematic) and explain how stande deviation and beta are related to them. Explain why we only care about systematic risk. [6] 5. W inc. has an overall expected equity cost of capital of 12%, market value of equity of $3 billion, and market value of debt of $2 billion with a cost of debt equal to 3%. It is composed of two divisions: One division sells software and the other division sells oomputers. Each division represents 50% of the total rm. You have decided that Hewlett Packard (HP) is very similar to your computer division, in terms of both risk and nancing. You go online and nd the following information: HP's equity beta is 0.8, its market value of equity is $90 billion, and it has $10 billion in debt. [a] Calculate the appropriate disoount rate for decisions in its computer division? [8] (b) Calculate the appropriate discount rate for decisions in its software division? [8] ASSUME: Risk-free rate=3%; Equity market risk premium=7%; Tax rate=21%.6. Macrosoft Gaming Inc. is a private company with cash flows of $0.75 per share, earnings of $1.20 per share and 100,000 shares outstanding. Gamers.tv is a comparable public company with a price of $50 per share, cash flows of $2.00 per share, and 500,000 shares outstanding. If Gamers.tv is a sufficiently comparable company, what do you estimate Macrosoft Gaming Inc.'s price per share to be? [4] 7. Assume AAA inc. has an equity beta of 1.5, a standard deviation of returns of 0.18, and its current price is $35 per share. Assume BBB inc. has an equity beta of 0.5, a standard deviation of returns of 0.15, and its current price is $15 per share. You decide to buy 100 shares of AAA inc. and 100 shares of BBB inc. (a) What fraction of your portfolio is initially invested in BBB inc? [2] (b) What is a 95% confidence (prediction) interval for AAA inc.'s return? [4] (c) What is your portfolio's expected return? [8] (d) If you sold AAA inc. for $40 per share immediately after receiving a dividend of $0.10 per share, did it over or underperform expectation? [4]