Problem Set #$1-$ FIN $600($Due date: March $31,$ Friday$)$

Name:

$($Student ID Number:

$(2$ points$)$ Find the CAPM beta of the following stock, where $R_E$ is stock return, $R_M$ is market return, $\frac{?}{\text{b}\text{a}\text{r}}(R{)}_E$ is

average of stock returns, $\frac{?}{\text{b}\text{a}\text{r}}(R{)}_M$ is average of market returns, COV$(R_E,R_M)$ is covariance between $R_E$ and $R_M,$ and

VAR$(R_M)$ is variance of market returns.

CAPM beta $=$COV$\frac{R_E,R_M}{V}AR(R_M)=$

$(4$ points$)$ Currently, Hotel $x$ has no debt $($i$.$e$.,$ leverage $=0).$ The CEO of Hotel $x$ considers increasing leverage

$(=$ debt$/($debt$+$equity$))0\mathrm{.}5.$ Currently, Hotel X$\text{'}$s CAPM beta is $2\mathrm{.}0.$ The cost of debt $(R_D)$ will be $10\%,$ riskfree rate

$(R_F)$ is $1\%,$ and market return $(R_M)$ is $11\%.$ Assume that the corporate tax rate $()$ is ZERO. Your task, as the

CFO of Hotel $x,$ is to provide the cost of capital under this proposed capital structure $($i$.$e$.,50\%$ leverage$).$

$3-1.$ The method to compute the cost of capital is called $()$ cost of capital.

$3-2.$ What is the CAPM beta under the proposed capital structure $($i$.$e$.,50\%$ leverage$)?$

${}_E=\frac{D+E}{E}{}_A=$

${}_E=$

$3-3.$ What is the cost of equity under proposed capital structure $($i$.$e$.,50\%$ leverage$)?$

$R_E=R_F+{}_E(R_M-R_F)=$

F

$3-4.$ What is the cost of capital under the proposed capital structure $($i$.$e$.,50\%$ leverage$)?$

$R_{\text{W}\text{A}\text{C}\text{C}}=(1-)R_D\frac{D}{D+E}+R_E\frac{E}{D+E}=$