180% Baiew Clarte enadAct Stylee AR AaBbCcDdEe AABNCCDOE A t Paragraph Book Title 5 1 T wnal 15 ne presCnL vaiue Ura payents ass0ciaLeu wILT nS INOLCI (d) If interest rates move down, what would happen to the value of this Note? (e) If a stranger was willing to buy or sell you the bond for $1000, would you buy or sell it - and why? (Hint: assume no altruism here.) 4. (20 points) Hot Pockets Corporation is considering going public. Managers want to estimate common stock value. The standard deviation of returns for this firm is 20%. The firm's beta is 0.8.3-month T-Bills currently trade at a discount to par of 2% on an annualized basis. The expected return on the stock market is 11%. There are 10,000 shares of common stock outstanding. Assume the firm's capital structure is 40% debt, 60 % common equity, the cost of debt is 6%, and the marginal tax rate for the firm is 21%. a) What is the total risk of this firm, and what is its systematic risk? b) What is the expected return of this stock? What is the name of the model you use to estimate it? c) What is the Weighted Average Cost of Capital for the firm? d) Using WACC as the appropriate discount rate, if the firm's estimated free cash flows over the next 3 years are: Estimated Free Cash Flow Year $100,000 $200,000 $300,000 2018 2019 2020 and after 2020 to infinity, expected free cash flows will grow at a rate of 4% per year: (i) what is the enterprise value of the firm (i.e., debt + equity)? e) (i) If an investor in Hot Pockets owns equal amounts of Hot Pockets, Nextera Energy, Southwest Airlines, and Caterpillar common stock, what will the market risk of his/her portfolio be? (Assume standard deviation of 10 %, 30% , and 25 % , and beta of .5, 1.5, and 1 for each of Nextera Energy, Southwest Airlines, and Caterpillar common stock.) (ii) Given the above information, what will be the percentage return on this investor's portfolio if the market goes up 10 %? jew Sec Pages 2 of 3 Words 979 o 1148 MacBook Air ES 3 4 5 6 7