(a) The risk-free rate is 2% and the market risk premium is 5%. Stock A has a beta of 1.5 and Stock B has a beta of 0.7. (a) What is the required return on each stock? (b) Assume that investors become more risk-averse. So the market risk premium rises from 5% to 8%. Assume that the risk-free rate remains constant. What effect will this have on the required rates of return of the two stocks. (b) Calculate the cost of retained earnings as the midrange estimate of the CAPM, DCF, and bond-yield-plus-risk-premium approaches. FRF = 5,5%,+M - TRP = 79,6 = 0,9, D. = $1.50, P = $25.00,9 = 7%, 4 - 7% (c) Project A and B have the following cash flows: 1 0 A-$1,000 $1,150 $300 B -$1,000 $250 $1,400 The cost of capital is 10% and they are mutually exclusive (a) Compute the NPV and make an investment decision. (b) Which investment is more liquid (and therefore also less risky)? (d) Compute the WACC for Firm B (the firm does not issue any new stock). It's target capital structure is given by: 49% debt, 5% preferred stock, 46% common equity. Tax rate = 40%; rd = 8%; , = 9%,r, = 12%. (e) PORTFOLIO REQUIRED RETURN. Suppose you are the money manager of a S4 million investment fund. The fund consists of four stocks with investments and betas as shown below. If the market's required rate of return is 14% and the risk-free rate is 6%, what is the fund's required rate of return? Stock Investment Beta $400,000 1.5 B $600,000 -0.50 $1,000,000 1.25 D $2,000,000 0.75