1. The following information relates to a three security portfolio. What is the expected returnfor the portfolio? Security Amount investedState of economyProbability of OccurrencePossible Return

A Birr 40,000 Boom 0.4 50%

B Birr 30,000 Normal 0.3 30%

C Birr 30,000 Recession 0.3 20%

2. A project requires an initial investment of Br. 500,000. It generates the following net cashflows for six years:Year 1 2 3 4 5 6 Net cash inflows at year end200,000 250,000 300,000 350,000 200,000 100,000If the required rate of return is 12%.

Required: Compute

a. Payback period

b. NPV & decide whether the project is accepted or rejected

c. Profitability index & decide whether the project is accepted or rejected

3. XYZ Corporation needs a fund to invest in projects after evaluating. XYZ Company decides to issue bond, preferred stock and common stock and use part of retained earnings. The company estimates that it can issue bond at a before-tax cost of 15%, and its tax rate is 40%. The company also can issue preferred stock at $105 per share with flotation cost of $ 5 per share, and pays a constant dividend of $10 per share per year. The company common stock currently sells at $165 per share and pays a flotation cost $ 15 per share. The current dividend is $50 per share, and is expected to grow at a constant rate of 5 % per year. The company's target capital structure consists of 30 % debt; 10% preferred stock, 20% retained earnings and 40 % common stock.

Required; Compute:

a. What is the after tax cost Bond ?

b. What is the cost preferred stock?

c. What is the cost of common stock?

d. What is the cost of retained

e. What is the WACC for XYZ Corporation?

f. If the alternative projects and their IRR is as follows:

Project IRR A 20% B 35% Which project would XYZ Corporation accept if the projects are independent considering the above weighted average cost of capital?