Body Type for Sty Mert am Length SONTO ILOLEJLO SLPO41024 THEORY AND APPLICATIONS: 1. RISK AND RETURN: Stock A and Stock B have the following distribution of rates of return; State of the economy Probability Stock A returns Stock B returns Recession 0.10 -20% 30% Normal 0.60 10 20 Boom 0.30 70 50 a. What are the expected returns and standard deviations of these two shares? b. As an investment analyst with Gold Coast Securities Ltd, which of these stocks would you recommend to a risk avoider investor? c. Suppose you have 20,000 to invest in these securities. If you put 14,000 in stock A and the remainder in stock B, what will be the expected return and standard deviation on your portfolio? Assume a correlation coefficient of -0.045. the dividend at a percer annual rate for the first three years and at a 10 percent rate for the next two years, and grow the dividend at a 5 percent rate thereafter. This phased- growth pattern is in keeping with the expected life cycle of earnings. You require a 16 percent return to invest in this stock. What is the most you will pay for this stock? 6. CAPITAL BUDGETING: Rojo Software, Inc., has the following projects. Year Project A Project B 0 -$7,500 -$5,000 1 4,000 2,500 2 3,500 1,200 3 1,500 3,000 Suppose Rojo's cutoff payback period is two years. Which of these two projects should be selected based on the payback period rule? b. Suppose Rojo's uses Net Present Value (NPV) rule to rank these two projects. If the appropriate discount rate is 15 percent, which project should be selected? c. Compute the internal rate of return (IRR) on for each project. Based on the IRR which project should be selected. a. Page 9 of 10