Project #76979 - Corporate Finance

 

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%?

 

 

 

Higher

Lower

 


 

 

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%?

 

 

 

Higher

Lower

 

 

 

 

 

 

 

 

 

 

 

 

 

3.      Epsilon Corp. is evaluating an expansion of its business. The cash-flow forecasts for the project are as follows:

 

 

 

Years

Cash Flow
($ millions)

0

−100

1-10

+15


 

 

 

The firm's existing assets have a beta of 1.4. The risk-free 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 risk-free 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 after-tax WACC, assuming that the company pays tax at a 35% rate? (Do not round intermediate calculations.)

 

 

 

  After-tax WACC

%  

 

 

 

5.      EZCUBE Corp. is 50% financed with long-term 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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