A potential venture investment has the following possible outcomes:

PerformanceProbability ofRate of

OutcomeOccurrenceReturn

Home Run (Success).20500.0%

Breakeven.35 15.0

Strikeout (Failure).45-100.0

A.What is the expected rate of return on the venture?

B. what is the variance and standard deviation of the rates of return for the venture.

C. what is the coefficient of variation of the rates of return for the venture. If the coefficient of variation of rates of return for your prior venture investments is 4.0, would the new venture be considered as being less or more risky?

Expected Rate of Return and Hubris Premiums

RateReturn

ComponentComponent

Liquidity premium7.5%

Risk-free rate6

Advisory premium8

Investment risk premium11.5

Target rate of return 40

A. what is the expected rate of return before considering premiums for illiquidity, advisory activities, and hubris projections.

B.Estimate the hubris projections premium for this FirstVenture investment.

Weighted Average Cost of Capital

Kareem Construction Company has the following amounts of interest-bearing debt and common equity capital:

FinancingDollarInterestCost of

SourceAmountRateCapital

Short-Term Loan$200,00011%

Long-Term Loan$200,00013%

Equity Capital$600,00024%

Kareem Construction is in the 30 percent average tax bracket.

A. what is the after-tax (WACC) for Kareem. The WACC equation is provided below:

WACC = (short-term debt rate) x (1- tax rate) x (short-term debt-to-value) + (long-term debt rate) x (1- tax rate) x (long-term debt-to-value) + (equity rate) x (1- debt-to-value)

B. How Kareem's WACC would change if the tax rate drops to 25 percent and the estimated cost of equity capital is based on a risk-free rate of 7 percent, a market risk premium of 8 percent, and a systematic risk measure or beta of 2.0.