Judy Chen is the primary portfolio manager of the global equities portfolio at Horizon Asset Management. Lars Johansson, a recently hired equity analyst, has been assigned to Chen to assist her with the portfolio. Chen recently sold shares of Novo-Gemini, Inc. from the portfolio. Chen tasks Johans-son with assessing the return performance of Novo-Gemini, with specific trade information provided in Exhibit 1. EXHIBIT 1 Novo-Gemini, Inc. Trade Details 1. Novo-Gemini shares were purchased for $20.75 per share. 2. At the time of purchase, research by Chen suggested that Novo-Gemini shares were expected to sell for $29.00 per share at the end of a 3-year holding period. 3. At the time of purchase, the required return for Novo-Gemini based upon the capital asset pricing model (CAPM) was estimated to be 12.6% on an annual basis. 4. Exactly 3 years after the purchase date, the shares were sold for $30.05 per share. 5. No dividends were paid by Novo-Gemini over the 3-year holding period. Chen explains to Johansson that, at the time of purchase, the CAPM used to estimate a required return for Novo-Gemini incorporated an unadjusted historical equity risk premium estimate for the US equity market. Chen notes that the US equities market has experienced a meaningful string of favorable inflation and productivity surprises in the past. She asks Johans-son whether the historical equity risk premium should have been adjusted before estimating the required return for Novo-Gemini. For another perspective on the reward to bearing risk, Chen asks Johansson to calculate a forward-looking equity risk premium for the US equity market using data on the S&P 500 index in Exhibit 2. EXHIBIT 2 S&P 500 Index Data Dividend yield, based on year-ahead aggregate forecasted dividends 1.2% Consensus long-term earnings growth rate 4% 20-year US government bond yield 3% Chen is now considering adding shares of Bezak, Inc. to the portfolio. Chen asks Johans-son to calculate Bezaks weighted average cost of capital using the CAPM with the information provided in Exhibit 3. EXHIBIT 3 Bezak, Inc. Pretax cost of debt 4.9% Long-term debt as a percent of total capital, at market value 25% Marginal tax rate 30% Bezak, Inc. beta 2.00 Estimated equity risk premium 5.5% Risk-free rate 3.0% Lastly, Chen asks Johansson to evaluate Twin Industries, a privately owned US company that may initiate a public stock offering. Johansson decides to adapt CAPM to estimate the required return on equity for Twin Industries. Using the MSCI / Standard & Poors Global Industry Classification Standard (GICS), Johansson identifies a publicly traded peer company with an estimated beta of 1.09 that is much larger but otherwise similar to Twin Industries. Twin Industries is funded 49% by debt, while the publicly traded peer company is funded 60% by debt.

a) Based upon Exhibit 1, the expected three-year holding period return for Novo-Gemini Inc. at the time of purchase was closest to: A. 39.76%. B. 42.76 C. 44.82

b) Based upon Exhibit 1, the realized three-year holding period return for Novo-Gemini Inc. was closest to: 39.76 42.35 44.82

c) Based on Exhibit 3, and assuming interest on debt is tax-deductible, the weighted average cost of capital (WACC) for Bezak, Inc. is closest to: 10.87% 11.36% 13.61%