1. Stock A has the following returns for various states of the economy:

State of
the Economy Probability Stock A's Return
Recession 10% -30%
Below Average 20% -5%
Average 40% 8%
Above Average 25% 25%
Boom 5% 50%

Stock A's expected return is: a)8.75% b)48% c)7.95% d)9.6%

2. The risk-free rate of interest is 4% and the market risk premium is 7%. Hughes Corporation has a beta of 1.3, and last year generated a return of 11% with a standard deviation of returns of 15%. The required return on Hughes Corporation stock is: a)11% b)13.1% c)12.2% d)11.5%

3. You are thinking of adding one of two investments to an already well- diversified portfolio.

Security A Security B Expected Return = 14% Expected Return = 12% Standard Deviation of Standard Deviation of Returns = 20.9% Returns = 10.1% Beta = 1.2 Beta = 1.2 If you are a risk-averse investor, which one is the better choice?

Security A

Security B

Security B, but only if Security B's required return is greater than 12%.

Either security would be acceptable because they have the same beta.

4. Williams Company stock has a beta of 1.3 and a required return of 13.1%, while Jones Inc. stock has a beta of .8 and a required return of 9.6%. The expected return on the market portfolio according to the CAPM is:

		12%
		11%
		13%
		10%

5.

A corporate bond has a face value of $1,000 and a coupon rate of 9.5%. The bond matures in 12 years and has a current market price of $1,100. If the corporation sells more bonds it will incur flotation costs of $48 per bond. If the corporate tax rate is 35%, what is the after-tax cost of debt capital?

		5.91%
		5.71%
		6.18%
		5.31%

6. Li Holding Company paid a dividend yesterday of $3 per share (D₀ = $3). The dividend is expected to grow at a constant rate of 5% per year. The price of Li's stock today is $22 per share. If Li decides to issue new common stock, flotation costs will equal $2 per share. Li's marginal tax rate is 40%. Based on the above information, the cost of retained earnings is:

		5.14%
		11.59%
		20.75%
		19.32% 7. The risk free rate of return is 2% and the market risk premium is 10%. Twindle Industries has a beta of 1.5 and a standard deviation of returns of 18%. Twindle's marginal tax rate is 35%. Analyst's expect Twindle's dividends to grow by at least 5% per year for the next 5 years. Using the capital asset pricing model, what is Twindle's cost of retained earnings?

		12%
		13%
		17%
		14%

8. Jones Company has a target capital structure of 40% debt, 10% preferred stock, and 50% common equity. The company's after-tax cost of debt is 8%, its cost of preferred stock is 10%, its cost of retained earnings is 14%, and its cost of new common stock is 16%. The company stock has a beta of 1.2 and the company's marginal tax rate is 35%. What is the company's weighted average cost of capital if retained earnings are used to fund the common equity portion?

		16.80%
		8.00%
		11.20%
		6.72% 9. S&S Corp. is investing in a major capital budgeting project that will require the expenditure of $10 million. The money will be raised by issuing $3 million of bonds, $1 million of preferred stock, and $6 million of new common stock. The company estimates is after-tax cost of debt to be 6%, its cost of preferred stock to be 8%, the cost of retained earnings to be 12%, and the cost of new common stock to be 15%. What is the weighted average cost of capital for this project?

		11.60%
		29.00%
		9.67%
		10.25%

10. The interest rate on a one year security in the United States is 6%, while the interest rate on a one year security in France is 8%. If the current exchange rate is 1 EURO = $1.25, then the future exchange rate in one year, according to the international Fisher effect, is:

		$1.227
		$1.157
		$1.275
		$1.252 11. Given the following information on S & G Inc.'s capital structure, compute the company's weighted average cost of capital.

Type of Percent of Before-Tax Capital Capital Structure Component Cost Bonds 40% 7.5% Preferred Stock 5% 11% Common Stock (Internal Only) 55% 15% The company's marginal tax rate is 40%.

		10%
		10.6%
		7.1%
		13.3%