Assume that the riskfree rate of interest is 3% and you estimate the markets expected return to be 9%. There are four firms under consideration with the following characteristics:

Firm	Beta	Volatility
A	.45	20%
B	.75	18%
C	1.05	35%
D	1.20	25%

1. Which firm has the least total risk? Explain.

2. Which firm has the most market risk? Explain.

3. For the firm with the highest cost of capital, determine its equity cost of equity capital.

4. Determine the equity cost of capital for firm C.

5. Firm C is to pay a dividend of $2 per share next year. The growth rate of the dividend is expected to be 5% per year forever. What should the price of its stock be?

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