20A) Stock As common stock has an estimated beta of 1.3. Stock Bs common stock has an estimated beta of 0.67. Stock Cs common stock has an annual expected return, E(r), of 12.1% (estimated via the CAPM). Stock A pays quarterly cash dividends, but Stocks B and C pay no dividends at all. The broad stock-market has an expected annual return of 9.7%. One year, US Treasury zero-coupon bonds (with a $1000 face value), are currently selling for $978.

Determine the expected return of the three-asset portfolio formed by investing $18,880 in Stock A, $21,685 in Stock B, and $27,982 in Stock C.

Enter the expected return as a percentage, not as a decimal, using at least 4 digits of precision.

B) Chunk-Down Enterprises is expected to have an ROE of 7.6% per year forever. Based on risk, youve estimated the fair discount rate of their common stock to be 9.1%, when measured as an EAR. Much like ROE, the fair discount rate is also expected to remain at this level forever.

The firms current level of equity (as measured on the balance sheet), is $43.74 per share. The firm pays annual dividends, and the next dividend is due one year from today. The firm plans to always pay out 23% of their earnings in the form of dividends.

You have been hired to advise management on how to maximize the value of the firm, to the current owners of the firm.

What advice should you provide to management?

(1) Increase the dividend payout from 23% to a higher value.

(2) Decrease the dividend payout from 23% to a lower value.

(3) Keep the dividend payout ratio at 23%.

(4) Liquidate the firm entirely, pay off all debt, and pay the remaining funds to the current stock holders.

(5) None of the above.

Enter an value from 1 to 5 based upon your best recomendation.