1.Ameritech Corporation paid dividends per share of $3.56 last year and dividends are expected to grow 5.5 percent a year forever. The stock has a beta of 0.9. The T-bills are currently yielding 6.25 percent and the market risk premium is 7.5 percent.

a.What is the Gordon Growth model value per share?

b.The stock is currently trading at $80 per share. What dividend growth rate will justify this price?

2.Shanken Corp. issued a 20-year, 10 percent semiannual bond 2 years ago. The bond currently sells for 93 percent of its face value. The company's tax rate is 35 percent.

a.What is the firms pre-tax cost of debt?

b.What is the firms after-tax cost of debt?

c.You just found out that the bonds have been downgraded to BB due to default concerns. How would this affect the expected return on these bonds if analysist forecasts call for a recession and the average loss per $1 of unsecured debts is 60 cents. (use Table 12.2)

3. Suppose Goodyear Tire and Rubber Company has an equity cost of capital of 8.5%, a debt cost of capital of 7%, a marginal corporate tax rate of 35%, and a debt-equity ratio of 2.6. Suppose Goodyear maintains a constant debt-equity ratio.

a.What is Goodyears WACC?

b.What is Goodyears unlevered cost of capital?

c.Explain, intuitively, why Goodyears unlevered cost of capital is less than its equity cost of capital and higher than its WACC.

4.You have $250,000 to invest in a portfolio containing Stock X and Stock Y. Your goal is to create a portfolio that has an expected return of 14.52 percent. Stock X has an expected return of 12.48 percent and a beta of 1.32, and Stock Y has an expected return of 8.45 percent and a beta of .70.

a.How much money will you invest in Stock Y?

b.What is the beta of your portfolio?

1. Explain whether each of the following projects is likely to have risk similar to the average risk of the firm.

a.The Clorox Company considers launching a new version of Armor All designed to clean and protect notebook computers.

b.Google, Inc., plans to purchase real estate to expand its headquarters.

c.Target Corporation decides to expand the number of stores it has in the southeastern United States.

d.GE decides to open a new Universal Studios theme park in China.

2.What are the major disadvantages of using historic time series data in the process of forecasting of future returns, risk premiums, systematic risk of securities, etc. ? What are some ways to mitigate these disadvantages?