1.

value: 3.00 points

Investors expect the market rate of return this year to be 15%. A stock with a beta of 1.4 has an expected rate of return of 20%. If the market return this year turns out to be 10%, what is the rate of return on the stock? (Do not round intermediate calculations. Enter your answer as a percent rounded to 1 decimal place.)

Stock return

%

2.

value: 3.00 points

You are considering acquiring a firm that you believe can generate expected cash flows of $19,000 a year forever. However, you recognize that those cash flows are uncertain.

a.	Suppose you believe that the beta of the firm is 1.3. How much is the firm worth if the risk-free rate is 3% and the expected rate of return on the market portfolio is 8%? (Do not round intermediate calculations. Round your answer to 2 decimal places.)

Value of the firm

$

b.	By how much will you overvalue the firm if its beta is actually 1.8? (Do not round intermediate calculations. Round your answer to 2 decimal places.)

Overvaluation

$

3.

value: 3.00 points

The risk-free rate is 6% and the expected rate of return on the market portfolio is 10%.

a.	Calculate the required rate of return on a security with a beta of 1.24. (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places.)

Required return

%

b.

If the security is expected to return 16%, is it overpriced or underpriced?

	Overpriced
	Underpriced

4.

value: 3.00 points

A share of stock with a beta of .72 now sells for $47. Investors expect the stock to pay a year-end dividend of $2. The T-bill rate is 3%, and the market risk premium is 6%. If the stock is perceived to be fairly priced today, what must be investors expectation of the price of the stock at the end of the year?(Do not round intermediate calculations. Round your answer to 3 decimal places.)

Stock price

$

5.

value: 3.00 points

A share of stock with a beta of .76 now sells for $51. Investors expect the stock to pay a year-end dividend of $2. The T-bill rate is 3%, and the market risk premium is 7%.

a.	Suppose investors believe the stock will sell for $53 at year-end. Is the stock a good or bad buy? What will investors do?

The stock is a (Click to select) good bad buy and the investors (Click to select) will invest will not invest .

b.	At what price will the stock reach an equilibrium at which it is perceived as fairly priced today? (Do not round intermediate calculations. Round your answer to 2 decimal places.)

Stock price

$

6.

value: 3.00 points

We Do Bankruptcies is a law firm that specializes in providing advice to firms in financial distress. It prospers in recessions when other firms are struggling. Consequently, its beta is negative, .3.

a.	If the interest rate on Treasury bills is 4% and the expected return on the market portfolio is 14%, what is the expected return on the shares of the law firm according to the CAPM? (Enter your answer as a whole percent.)

Expected return

%

b.	Suppose you invested 70% of your wealth in the market portfolio and the remainder of your wealth in the shares in the law firm. What would be the beta of your portfolio? (Round your answer to 2 decimal places.)

Portfolio beta