15)

You are considering investing in BBW stock. Your broker reports to you the

following information on retrospective returns Ri, and the stock price Pi.

Year i Ri Pi

2015 0.30 $2.20

2016 0.20 $1.80

2017 0.10 $2.08

2018 0.15 $2.00

a) Indicate the appropriate formula, with the values included, to compute the standard deviation

of these ex-post returns, and then calculate it

b) Using the dividend growth model, find was dividend received in 2016?

20)

Peach Computer Company is headquartered in Chicago, Illinois with offices in

New York and Los Angeles. Peach has $9 million debt outstanding. The 1 million outstanding

shares of Peaches stock are currently selling for $20 per share although they are recorded on the

company books at the issue price of $15 per share. Peach Computer has an asset beta of 1.50.

The current risk-free rate and the annual effective yield on debt is 5.5%. The market risk

premium is 11%. Plums corporate income tax rate is 35%.

a) Assume the CAPM holds. Calculate the weighted average cost of capital for Peach.

b) Peach is considering two independent capital budgeting projects presented below. Assume

the financing for the project is in the same proportion as that for the firm. For each project

compute a new WACC using the given project beta for the risk associated with equity. Then

evaluate each project and indicate whether or not the project should be selected and why?

Project Life Annual Cash Flows Initial Outlay Project Beta

A 10 years $10 million $50 million 0.00

B 5 years $ $12 million $35 million 1.50

(please show all steps)