1

The stock of Big Joe's has a beta of 1.58 and an expected return of 13.00 percent. The risk-free rate of return is 5.5 percent. What is the expected return on the market?

a. 16.19 percent

b. 4.31 percent

c. 7.50 percent

d. 10.25 percent

e. 8.67 percent

2

Which one of the following stocks is correctly priced if the risk-free rate of return is 3.6 percent and the market risk premium is 8.3 percent?

Stock	Beta	Expected Return
A	0.75	12.50%
B	1.54	12.63%
C	1.20	13.56%
D	1.30	11.90%
E	0.90	8.65%

Stock C

Stock D

Stock A

Stock E

Stock B

3

Jensen's Travel Agency has 8 percent preferred stock outstanding that is currently selling for $38 a share. The market rate of return is 15 percent and the firm's tax rate is 34 percent. What is Jensen's cost of preferred stock?

5.28 percent

7.16 percent

21.05 percent

39.47 percent

6.89 percent