B 1. Consider the following information: State Probability A Boom 0.6 20% -5% Bust 0.4 -10% 10% a. What are the expected return and standard deviation of stock A and stock B? (10%) b. If you invest 50% of your money in stock A and 50% of your money in stock B, what are the expected return and standard deviation for the portfolio as a whole (considering both states of the economy)? (10%) c. Use the results of a-e to explain the benefit of diversification. (5%) (Underline your final answer for a, b and c, e.g., Ans.: XXXX) 2. Answer the following questions regarding bond valuation. a. What is the price of a $1,000 par value bond with a 6% coupon rate paid semi- annually, if the bond is priced to yield 4% and it has five years to maturity? (10%) b. Following a, what would be the price of the bond if the coupon is paid quarterly? (5%) c. Explain how the calculation changes, given semi-annual coupons in (a) versus quarterly coupons in (b). (10%) (Underline your final answer for a and b, e.g., Ans.: XXXX) 3. Momo is a fast-growing company. The company will pay its first dividend of $2.45 a year from now. The company projects a rapid growth of 30% for the next year, then a growth rate of 17% for the following two years. After that, the company expects a constant growth rate of 8%. a. Use the timeline to show the amount and timing of the dividends. (10%) b. If your required rate of return on such shares is 22%, what is the current price of the share? (15%) (Underline your final answer for b, e.g., Ans.: XXXX) 4. Answer the following questions about the weighted average cost of capital (WACC). a. What is the WACC and why it is important? (10%) b. If a company uses its WACC as the same discount rate for evaluating all the projects without considering their risk, what problems will occur? Next, what are the solutions? (15%)