Expected return on two stocks for two particular market returns:

Market Return Aggressive Stock Defensive Stock

4% -2% 6%

20% 22% 12%

a. What are the betas of the two stocks?

b. What is the expected rate of return on each stock if the market return is equally likely to be 3% or 20%?

c. If the T-bill rate is 2% and the market return is equally likely to be 3% or 20%, draw the SML for this economy.

d. Which stock is undervalued and which stock is overvalued? Why?

Please determine the WACC (weighted average cost of capital) for the company with following assumptions: The company maintains a debt-to-equity ratio equal to 2. The marginal tax rate is 30%. The companys current bonds have a yield to maturity of about 6.00%. The current 10-year Treasury notes have a yield to maturity of 2% and the forecast for the S&P 500 market return of 11.00%. The companys overall beta is 1.20.