1. Swans sportswear is considering bringing out a line of designer jeans. Currently, it is negotiating with two different well-known designers. Because of the highly competitive nature of the industry, the two lines of jeans have been given code names. After market research, the firm has established the following expectations: Market acceptance Line 1 ROR Probability Line 2 ROR Probability Very poor 0.75% 0.15 1.0% 0.10 Poor 1.25% 0.25 2.5% 0.40 Average 8.5% 0.40 8.0% 0.20 Good 14.75% 0.15 13.5% 0.20 Excellent 16.25% 0.05 15.0% 0.10 a. What is the expected return for each line? b. Which is the riskiest? 2. Philipp Mandregan is considering investment in a project with a beta coefficient of 1.75. What would you recommend that he do if this investment has an 11.5 percent rate of return, the risk-free rate of return is 5.5 percent, and the rate of return on the market portfolio of assets is 8.5 percent? 3. Draw a graph of the characteristic line for a stock with a beta coefficient of 0.75. What would happen to the expected return on the stock if the market return increased from 4.5% to 6% 4. 10 years ago, Hewlitt-Packard Company issued 20-year bonds of $1,000 par value with a 9% coupon rate. The issue pays interest semi-annually. Bonds of similar risk are currently selling to yield a 6% rate of return. What is the value today of these Hewlitt-Packard Company bonds? 5. To expand its facility, the Kingston Outlet factory would like to issue a bond with par value of $1,000, coupon rate of 10%, paid semi-annually and maturity of 10 years. What would be the issue price of the bond, assuming it was issued today, if the market rate of return on securities of similar risk is 8%? 6. What is the yield to maturity, to the nearest percent, of the following bond: current price is $1,166, coupon rate is 12%, paid annually, face amount of $1,000, 10 years to maturity? 7. The board of directors of Scooter World, Inc. has declared a common stock dividend of $5.00 and accepted a plan to freeze the dividend at that amount indefinitely. What is the maximum price you would pay for the stock if you could earn 15% on assets of similar risk