1. Consider a risky portfolio. The end-of-year cash flow derived from the portfolio will be either $55,000 or $300,000 with equal probabilities of 0.5. The alternative risk-free investment in T-bills pays 6% per year. a. If you require a risk premium of 5%, how much will you be willing to pay for the portfolio? (a). What will be the expected rate of return on the portfolio?

b. Suppose that the portfolio can be purchased for the amount you found in

2. Moderate Growth Company paid a dividend last year of $2.90. The expected ROE for next year is 13%. An appropriate required return on the stock is 11%. If the firm has a plowback ratio of 47%, what should the dividend in the coming year be?

3. A 10-year bond of a firm in severe financial distress has a coupon rate of 14% and sells for $900. The firm is currently renegotiating the debt, and it appears that the lenders will allow the firm to reduce coupon payments on the bond to one-half the originally contracted amount. The firm can handle these lower payments. What are (a) the stated and (b) the expected yield to maturity of the bonds? The bond makes its coupon payments annually

4. Refer to Table 2.6 and look at the Microsoft options. Suppose you buy a January expiration call option with exercise price $100. a-1. Suppose the stock price in January is $103.80. Will you exercise your call? a-2. What is the profit (loss) on your position?