1) If investors aversion to risk increase, would the risk premium on a high-beta stock increase by more or less than that on a low-beta stock? Explain.

2) If a companys beta were to double, would its expected returns double?

3.) A bond that pays interest forever and has no maturity date is a perpetual bond, also called a perpetuity or a consol. In what respect is a perpetual bond similar to (1) a no-growth common stock and (2) a share of preferred stock?

4.) Required Rates of Return

Suppose that the risk-free rate is 5% and that the market risk premium is 7%. What is the required return on (1) the market, (2) a sock with a beta of 1.0, and (3) a stock with a beta of 1.7? Assume that the risk-free rate is 5% and that the market risk premium is 7%

5.) Extended Return: Discrete Distribution

A stocks return has the following distributions:

Demand for the Probability of This Rate of Return If This

Companys Products Demand Occurring Demand Occurs (%)

Weak 0.1 -50%

Below Average 0.2 -5

Average 0.4 16

Above Average 0.2 25

Strong -0.1 60

1.0

6.) Preferred Stock Valuation

Nicks Enchiladas Incorporated has preferred stock outstanding that pays a dividend of $5 at the end of each year. The preferred sells for $50 a share. What is the stocks required rate of return (assume the market is in equilibrium with the required return equal to the expected return)?

7.) Constant Growth Valuation

Crisp Cookwares common stock is expected to pay a dividend of $3 a share at the end of this year (D1=$3.0); ots beta is 0.8; the risk-free rate is 5.2%; and the market risk premium is 6%. The dividend is expected to grow at some constant rate g, and the stock currently sells for $40 a share. Assuming the market is in equilibrium, what does the market believe will be the stocks price at the end of 3 years (i.e. what is P3)?