3. Stock Risk and Pricing: (15 points)

You are analyzing Club Auto Parts Co. The risk-free rate (rf) is 2%, the return on the market (rm) is 6%, and the stocks beta (b) is 1.5.

______ 3a. What is the required rate of return in the SML model? (Show all work.

______ 3b. Club Auto Parts Co. went public five years ago. Based on the stock performance below, what is its expected rate of return? (Show all work.)

Year	Return
2015	25%
2016	-15%
2017	12%
2018	20%
2019	18%

______ 3c. Based on the above information, would you invest in Club Auto Parts stock? Why?

______ 4. Capital Budgeting: This question has five parts. Here you have to find Net Present Value (NPV) for the two projects. (Show all work.) (15 points)

	Expected Net Cash Flows
Year	Project A	Project B
0	($5,000)	($5,000)
1	$700	$750
2	$1,000	$1,250
3	$3,250	$3,000
4	$3,500	$3,250

______ 4a. If the opportunity cost of capital is 10%, what is the NPV of Project A (round to the nearest penny)?

______ 4b. If the opportunity cost of capital is 10%, what is the NPV of Project A (round to the nearest penny)?

4c. If you have a choice between Project A and Project B, which one would you choose and why?