1. Here are returns and standard deviations for four investments. 

Return 
Standard Deviation 
Treasury bills 
6% 
0% 
Stock P 
10 
14 
Stock Q 
14.5 
28 
Stock R 
21 
26 

Calculate the standard deviations of the following portfolios. 
a. 
50% in Treasury bills, 50% in stock P. 
Standard deviation 
% 
b. 
50% each in Q and R, assuming the shares have: (Do not round intermediate calculations. Round your answers to 1 decimal place.) 

Standard Deviation 
Perfect positive correlation 
% 
Perfect negative correlation 
% 
No correlation 
% 
2. Suppose that the Treasury bill rate is 6% rather than 2%. Assume that the expected return on the market stays at 10%. Use the following information. 
Stock 
Beta (β) 
A 
1.78 
B 
1.54 
C 
1.53 
D 
0.98 
E 
0.95 
F 
0.80 
G 
0.75 
H 
0.66 
I 
0.42 
J 
0.40 

a. 
Calculate the expected return from H. (Do not round intermediate calculations. Round your answer to 2 decimal places.) 
Expected return 
% 
b. 
Find the highest expected return that is offered by one of these stocks. (Do not round intermediate calculations. Round your answer to 2 decimal places.) 
Highest expected return 
% 
c. 
Find the lowest expected return that is offered by one of these stocks. (Do not round intermediate calculations. Round your answer to 2 decimal places.) 
Lowest expected return 
% 
d. 
Assume that the expected market return stays at 10%. Would C offer a higher or lower expected return if the Treasury bill interest rate were 6% rather than 2%? 






e. 
Assume that the expected market return stays at 10%. Would I offer a higher or lower expected return if the interest rate were 6% rather than 8%? 







3. Epsilon Corp. is evaluating an expansion of its business. The cashflow forecasts for the project are as follows: 
Years 
Cash Flow 
0 
−100 
110 
+15 

The firm's existing assets have a beta of 1.4. The riskfree interest rate is 4% and the expected return on the market portfolio is 12%. What is the project's NPV? (Enter your answer in millions. Negative amount should be indicated by a minus sign. Do not round intermediate calculations. Round your answer to 2 decimal places.) 
NPV 
$ 
4. A company is 40% financed by riskfree debt. The interest rate is 10%, the expected market risk premium is 8%, and the beta of the company’s common stock is .5. 
a. 
What is the company cost of capital? (Do not round intermediate calculations. Round your answer to 1 decimal place.) 
Cost of capital 
% 
b. 
What is the aftertax WACC, assuming that the company pays tax at a 35% rate? (Do not round intermediate calculations.) 
Aftertax WACC 
% 
5. EZCUBE Corp. is 50% financed with longterm bonds and 50% with common equity. The debt securities have a beta of .15. The company’s equity beta is 1.25. What is EZCUBE’s asset beta? (Do not round intermediate calculations. Round your answer to 1 decimal place.) 
Beta of assets 

Subject  Business 
Due By (Pacific Time)  07/23/2015 12:00 am 
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