2. Consider the following information on the three stocks A and B and C State of Rate of Return if State occurs Probability of State of Economy economy Stock A Stock B Stock C B 0.35 0.55 - 0.35 0.4 Normal 0.5 0.35 0.2 0.35 20 pts Bust 0.15 0.15 0.75 0.3 Portfolio P is invested 45% in stock A, 55% in stock B. Portfolio Q is invested 45% in stock C, and 55% in stock B. The risk-free rate is 3%, and the market risk premium is 6%. 71 Par FINAL 2020.2021 a. Calculate Portfolio P's expected return, and portfolio Q's expected return. b. Assume that CAPM holds true for the three stocks, meaning the expected returns of each stock truly reflects the level of risk embedded in it. Which stock has the highest systematic risk? C. Calculate each portfolio's total risks. Comment on the comparative total risks of Portfolio P and Portfolio Q. Provide your answer here: PART III: COST OF CAPITAL (15 POINTS) Horizon Investment Corporation has 9 million shares of common stocks outstanding, 250,000 shares of preferred stock outstanding (annual preferred dividend rate of 4.5%, par value = $100); and 105,000 semiannual bonds outstanding with annual coupon rate 15 pts 9 Page FINAL 2020.2021 of 8% and par value of $1,000 each. The company also has an outstanding bank loan at Bank of America (BOA) with a current book value of $15,500,000 and interest rate of 6.5% per annum. The common stock currently sells for $24 a share and has a beta of 1.15, a book value of $18 a share. The preferred stock currently sells for $94 per share The bonds have 15 years to maturity and are currently traded at par. The market risk premium is 8.5%; T-bills are yielding 5% and tax rate is 35%. a. Calculate the firm's market value of Debt and market value of equity. b. Calculate the firm's WACC Provide your calculation here: O