Problem Set 3 1. Consider the following table for an eight-year period: Year T-bill return Inflation 1 7.47% 8.53% 2 8.94 12.16 3 6.05 6.76 4 5.97 5.04 5 5.63 6.52 6 8.54 8.84 7 10.74 13.11 8 13.00 12.34 a, Calculate the average return for Treasury bills and the average annual inflation rate (consumer price index) for this period. b. Calculate the standard deviation of Treasury bill returns and inflation over this time period. c. Calculate the real return for each year. d. What is the average real return for Treasury bills? 2. A stock has a beta of 1.26 and an expected return of 12.4 percent. A risk-free asset currently carns 4.1 percent a, What is the expected return on a portfolio that is equally invested in the two assets? b. If a portfolio of the two assets has a beta of 86, what are the portfolio weights? c. If a portfolio of the two assets has an expected return of 11.6 percent, what is its beta? d. If a portfolio of the two assets has a beta of 2.46, what are the portfolio weights? 3. You are given the following information for Lightning Power Co. Assume the company's tax rate is 21 percent. Debt: 21,000 7 percent coupon bonds outstanding, $1,000 par value, 22 years to maturity, selling for 108 percent of par, the bonds make semiannual payments. Common stock: 540,000 shares outstanding, selling for $72 per share; beta is 1.18. Preferred stock: 24,000 shares of 4.8 percent preferred stock outstanding, currently selling for $93 per share. The par value is $100 per share. Market: 5 percent market risk premium and 5.3 percent risk-free rate. What is the company's WACC