1. (15 points) For parts a and b, use a risk-free rate of 1.5% and a market risk premium is 5%.

   1. (10 points) The Cheesecake Factory, Inc (CAKE) currently trades for $36.71 per share. You expect the stock to pay a dividend of $1.7 per share in one year, and to trade for $37 per share immediately after the $1.7 dividend is paid. CAKEs beta is 0.45.

      1. (5 points) What is CAKEs alpha?

      2. (5 points) What portfolio P, combining the market portfolio and the risk-free asset,

         has exactly the same beta as CAKE? (You have to find the weight on the market portfolio, , and the weight on the risk-free asset, , such that your portfolio beta, , is equal to the beta of CAKE stock.)

   2. (5 points) Macys, Inc (M) plans to issue 10-year bonds. It believes the bonds will have a BB rating. BB bonds have a default probability of 2.2%, a 60% expected loss rate in the event of default and a beta of 0.17. Estimate the yield Macys will have to promise its investors.