1.Sun product has 40,000 shares of common stock outstanding with a beta of 1.50 and a market price of $50 per share. There are 10,000 shares of 7 percent preferred stock (i.e. dividendof this preferred stock is $7.)andmarket value is $70 per share.The 8 percent semiannual bonds have a face value of $1,000 and are selling at 96 percent of par. There are 5,000 bonds outstanding that mature in 10 years. The market risk premium is 7 percent, T-bills are yielding 3 percent, and the tax rate is 40 percent.

A. What is the cost of common stock?

a. 13.50 percent

b. 10.25 percent

c. 12.50 percent

d. 9.30 percent

e. 14.25 percent

B. Whatis the weighted average of cost of capital (WACC)?

9.37 percent

12.50 percent

11.20 percent

6.54 percent

7.84 percent

2.Teenie Enterprises has a capital structure of 45 percent common stock, 5 percent preferred stock, and 50 percent debt. The flotation costs are 4.5 percent for debt, 7 percent for preferred stock, and 9.5 percent for common stock. The corporate tax rate is 34 percent. What is the weighted average flotation cost?

A.5.88 percent

B.6.28 percent

C.5.38 percent

D.6.88 percent

E.6.25 percent

3.You would like to combine a risky stock with a beta of 1.65 with U.S. Treasury bills in such a way that the risk level of the portfolio is equivalent to the risk level of the overall market. What percentage of the portfolio should be invested in the risky stock?

A.32 percent

B.60 percent

C.68 percent

D.40 percent

E.54 percent

4.You have a $10,000 portfolio which is invested in stocks A and B, and a risk-free asset. $5,000 is invested in stock A. Stock A has a beta of 1.80 and stock B has a beta of 0.90. How much needs to be invested in stock B if you want a portfolio beta of 1.20?

A.$5,419.27

B.$3,333.33

C.$4,333.33

D.$4,706.20

E.$3,750.00

5.What are the expected return and standard deviation on a portfolio that is invested 40 percent in Stock X and 60 percent in Stock Y? (E(R_P), SD_P)

State of Economy Probability of State Of Economy Rate of Return if State Occurs

Stock X Stock Y

Boom 6% 22% 18%

Normal 92% 15% 14%

Bust 2% -26% 9%

A. (14.32%, 3.13%)

B. (14.32%, 6.03%)

C. (14.14%, 6.03%)

D. (14.32%, 3.02%)

E. (14.14%, 3.02%)