question 1

Cost of common stock equityCAPMNetflix common stock has abeta, b, of 1.5. Therisk-free rate is 6%, and the market return is 9%.

a.Determine the risk premium on Netflix common stock.

b.Determine the required return that Netflix common stock should provide.

c.DetermineNetflix's cost of common stock equity using the CAPM.

queation 2

Term Structure A1-year Treasury bill currently offers a 5% rate of return. A2-year Treasury note offers a 5.5% rate of return. Under the expectationstheory, what rate of return do investors expect a1-year Treasury bill to pay nextyear?

queation 3

Cost of debt using both methods(YTM and the approximationformula)Currently, Warren Industries can sell 15-year, $1,000-par-value bonds paying annual interest at a 7% coupon rate. Because current market rates for similar bonds are just under 7%, Warren can sell its bonds for $1,030 each; Warren will incur flotation costs of $30 per bond. The firm is in the 24% tax bracket.

a.Find the net proceeds from the sale of thebond, Nd.

b.Calculate thebond's yield to maturity(YTM) to estimate thebefore-tax andafter-tax costs of debt.

c.Use the approximation formula to estimate thebefore-tax andafter-tax costs of debt.

queation 4

Preferred stock valuation TXS Manufacturing has an outstanding preferred stock issue with a par value of $63 per share. The preferred shares pay dividends annually at a rate of 11%.

a.What is the annual dividend on TXS preferredstock?

b.If investors require a return of 6% on this stock and the next dividend is payable one year fromnow, what is the price of TXS preferredstock?

c.Suppose that TXS has not paid dividends on its preferred shares in the past twoyears, but investors believe that it will start paying dividends again in one year. What is the value of TXS preferred stock if it is cumulative and if investors requirea(n) 6% rate ofreturn?

Real and nominal rates interestZane Perelli currently has $104 that he can spend today on socks costing $2.60 each. Alternatively, he could invest the $104 in arisk-free U.S. Treasury security that is expected to earn a12% nominal rate of interest. The consensus forecast of leading economists is a 6% rate of inflation over the coming year.

a.How many socks can Zane purchasetoday?

b.How much money will Zane have at the end of 1 year if he forgoes purchasing the socks today and invests his moneyinstead? (Ignore taxes.)

c.How much would you expect the socks to cost at the end of 1 year in light of the expectedinflation?

d.Use your findings in parts b and c to determine how many socks(fractions areOK) Zane can purchase at the end of 1 year. In percentageterms, how many more or fewer socks can Zane buy at the end of 1year?

e.What isZane's real rate of return over theyear? How is it related to the percentage change inZane's buying power found in part d? Explain.