1. The yield to maturity of a firm's debt is 4%. The tax rate is zero. The beta of its equity is 1.2. The risk-free rate is 1% and the market risk premium is 7%. Of the market value of the debt is 25 million and the market value of equity is 65 million what is the weighted average cost of capital of this firm?
2. 
   The risk-free interest rate is 1.5% and the expected rate of return for the market portfolio is 9.2%. What is the expected rate of return for a stock whose beta is 1.3? Note that the risk premium for the market index = expected return - risk free rate.
3. 
    A firm's debt is riskless with a beta of zero. The equity beta is 1.0. If the market value of equity is 60% of the market value of the firm what is the beta of its assets?
4. 
   The beta of the assets of a firm is 1.2. The firm's debt has a market value of 20 million and the market value of equity is 30 million. If the beta of the firm's debt is 0.2 what will be the beta of its equity?
5. 
   A stock with a beta of 2.0 has an expected return of 22%. Another stock with a beta of 0.5 has an expected return of 7%. What should be the risk free rate if the SML relationship holds?
6. 
   The pretax cost of debt for a firm is 6% and the cost of equity is 12%. If the firm's tax rate is 25% and the market value of equity is 60% of the market value of the firm what is its weighted average cost of capital?
7. 
   Consider the following two stocks: US steel with a beta of 2.33 and Pfizer with a beta of 0.67. A portfolio is formed with these two stocks in a way to make the portfolio beta equal to 1.0. If the total value of the portfolio is $10,000 what is the amount invested in US Steel?
8. 
   A firm's debt consists of bonds issued with a 6% coupon rate. The yield to maturity for the bond issue is 8% and the tax rate is 25%. What is the after-tax cost of debt for the firm?
9. 
    What is the beta of a portfolio which has $15,000 invested in the stock market index and $10,000 in the risk free asset?
10. 
    I have $10,000 to invest. I allocate $8,000 to the market index and the remainder is invested in a risk free asset. The risk free rate is 1.5% and the risk premium for the market index is 8%. What is the expected return for my investment?

Answer rating: 100% (QA)

1 The weighted average cost of capital WACC of the firm can be calculated as follows WACC Cost of Equity x of Equity Cost of Debt x of Debt where Cost of Equity RiskFree Rate Beta of Equity x Market R... View the full answer