Note: write the formula for all your answers and show all the calculations.

Question 1:

Consider the following information about three stocks:

State of Economy	Probability of State of Economy	Rate of Return if State Occurs
		Stock A	Stock B	Stock C
Boom	0.35	0.24	0.36	0.55
Normal	0.50	0.17	0.13	0.09
Bust	0.15	0.00	- 0.28	- 0.45

If your portfolio is invested 40 percent each in stock A and B and 20 percent in stock C, calculate the following:

The portfolio expected return?

The Portfolio Standard Deviation.

If the expected T-bill rate is 3.8 percent, what is the expected risk premium on the portfolio?

Question 2: (5 marks)

Given the following information for Even-flow Power Co:

Debt:

8,000 6.5 percent coupon bonds outstanding, $1,000 par value, 20 years to maturity, selling for 92 percent of par; the bonds make semiannual payments.

Common Stock:

250,000 shares outstanding, selling for $27 per share, the beta is 1.05.

Preferred Stock:

15,000 shares of 5 percent preferred stock outstanding, currently selling for $93 per share

Market:

8 percent market risk premium and 4.5 percent risk-free rate.

Calculate the Weighted Average Cost of Capital (WACC), assuming the companys tax rate is 35 percent.