Answered step by step
Verified Expert Solution
Link Copied!

Question

1 Approved Answer

provide answers for the problems in the attached file. Thank you Question 1 Zelo stock has a beta of 1.23. The risk-free rate of return

provide answers for the problems in the attached file. Thank you

image text in transcribed Question 1 Zelo stock has a beta of 1.23. The risk-free rate of return is 2.86 percent and the market rate of return is 11.47 percent. What is the amount of the risk premium on Zelo stock? Note: Risk premium is defined as the expected return of an asset minus the risk-free rate. Question 2 RTF stock is expected to return 10.6 percent if the economy booms and only 4.2 percent if the economy goes into a recessionary period. The probability of a boom is 55 percent while the probability of a recession is 45 percent. What is the standard deviation of the returns on RTF stock? Question 3 Phil's Carvings wants to have a weighted average cost of capital of 9.5 percent. The firm has an aftertax cost of debt of 6.5 percent and a cost of equity of 12.75 percent. What debt-equity ratio is needed for the firm to achieve its targeted weighted average cost of capital? Question 4 Sound Systems (SS) has 200,000 shares of common stock outstanding at a market price of $37 a share. SS recently paid an annual dividend in the amount of $1.20 per share. The dividend growth rate is 4 percent. SS also has 4,500 bonds outstanding with a face value of $1,000 per bond that are selling at 99 percent of par. The bonds have a 6 percent coupon and a 6.7 percent yield to maturity. If the tax rate is 34 percent, what is the weighted average cost of capital? Hint: First derive the market values of debt and equity, then determine the costs of debt and equity. You would need to use the dividend discount model to derive the cost of equity. Question 5 Stock A has a variance of .1428 while Stock B's variance is .0910. The covariance of the returns for these two stocks is -.0206. What is the correlation? Note: You need to use standard deviation, not variance, when computing the correlation. Question 6 Consider an asset with a beta of 1.2, a risk-free rate of 5%, and a market return of 13%. What is the expected return on the asset? Question 7 Hu's has 25,000 shares of common stock outstanding with a beta of 1.4, a market price of $32 a share, and a dividend yield of 5.7 percent. Dividends increase by 4.2 percent annually. The firm also has $450,000 of debt outstanding that is selling at 102 percent of par that has a yield to maturity of 6.8 percent. The tax rate is 35 percent. Question 8 The firm is considering a project that has the same risk level as the firm's current operations, an initial cost of $328,000 and cash inflows of $52,500, $155,000, and $225,000 for Years 1 to 3, respectively. What is the NPV of the project

Step by Step Solution

There are 3 Steps involved in it

Step: 1

blur-text-image

Get Instant Access to Expert-Tailored Solutions

See step-by-step solutions with expert insights and AI powered tools for academic success

Step: 2

blur-text-image

Step: 3

blur-text-image

Ace Your Homework with AI

Get the answers you need in no time with our AI-driven, step-by-step assistance

Get Started

Recommended Textbook for

Investments

Authors: Zvi Bodie

12th Edition

1260819426, 9781260819427

More Books

Students also viewed these Finance questions