Setup: Baker Coep. has several new projects that look attractive, but some are riskier than the firm's past projects. Baker has received a major inflow of cash from a venture capital firm, in exchange for $25\%$ of the firm's closely held stock. The VC firm has asked Baker managers to "run the numbers" to examine both the market outlook and the expected returns on each of the projects they are considering. The cash infusion will not cover all the proposed projects; Baker and its new investors need to know which projects should be approved.

i$.$ Based on Baker's earnings history over the past $10$ years, across a variety of projects, which have covered various states of the economy, the venture capital execs want Baker to estimate their everall returns. Given the following estimates of the economy over the seat several years, determine Baker's expected rate of return. $(4$ pts$)$ necessarily Alstoric market condivious for ate firm.

$\backslash$table$[[$Seste of the Economy,Carrent Frehabitity of State of Tee Reanomery,Bate of Benamis State Occurs$],[$Boom$,10\%,22\mathrm{.}00\%],[$Normal$,50\%,10\mathrm{.}00\%],[$Recestion$,4095,-15\mathrm{.}00\%]]$

Expected retern for "average" Baker Cerp. preject $($based ea assumed ecosomic probabilities$)=$

ii$.$ Hinterically, Baker projects have had an average beta of $1\mathrm{.}25,$ which indicates the higher risk levels for the firm. Assuming the market risk permium $($MRP$)$ currently estimated to be $5\mathrm{.}80\%$ and the risk$-$free rate is $4\mathrm{.}15\%,$ what is the required return for a Baker pooject with hased ce its average project beta? Show the average required return to $2$ decimal places $(x,x45).$

$(4$ pts $)$

Expected return for "average" company project $($based ea cerreat estimated MRP$)-$