Part A: Equity Valuation. 1. A share of Company Z preferred stock pays a quarterly dividend of $3.80. If investors require a 12 percent rate of return, what should be the price of this preferred stock?.

2. Over the past few years, Company A has retained, on the average, 70 percent of its earnings in the business. The future retention rate is expected to remain at 70 percent of earnings, and long-run earnings growth is expected to be 10 percent. If the risk-free rate, kRF, is 8 percent, the expected return on the market, kM, is 12 percent, Company A's beta is 2.0, and the most recent dividend, D0, was $1.50, what is the most likely market price and P/E ratio (P0/E1) for Company A's stock today? (Hint: Start by finding the required rate of return for Company A's investors.)

3. You are considering the purchase of a common stock that just paid a dividend of $2.00. You expect this stock to have a growth rate of 30 percent for the next 3 years, then to have a long-run normal growth rate of 10 percent thereafter. If you require a 15 percent rate of return, how much should you be willing to pay for this stock?

Part B: Risk and Return

1. Karen Wallace currently has an investment portfolio that contains 10 stocks that have a total value equal to $160,000. The portfolio has a beta (b) equal to 1.0. Karen wants to invest an additional $40,000 in a stock with b = 2.0.

After Karen adds the new stock to her portfolio, what will be the portfolio's beta?

2. Given the following information, compute the expected return, standard deviation and coefficient of variation for Company B.: Probability: 0.2, 0.3, 0.5 Return: 2.0%, 12.0%,5.0%