Question 1 - Miller Trust Corporation is considering a portfolio with 60% weighting in a cyclical stock and 40% weighting in a countercyclical stock. It is expected that there will be four economic states: Excellent, Good, Average and Bad, each with equal probabilities of occurrence. The cyclical stock is expected to have returns of 25%, 5% and 1%, -2% in Excellent, Good, Average and Bad economies respectively. The countercyclical stock is expected to have returns of -10% -8%, 2% and 14% in Excellent, Good, Average and Bad economies respectively. Given this information, calculate (rounded to 4 decimal places):

a) expected return for the portfolio;

b) variance for the portfolio.

Question 2 - Given the following information, what is the weighted average cost of capital for United Technologies Mega Corporation? (rounded to 4 decimal places)

Common stock: 1 million shares outstanding, $35 per share, $10 par value, beta = 1.65

Bonds: 10,000 bonds outstanding, $1,000 face value ach, 6.2% annual coupon, 15 years to maturity, market price = $1,101.23 per bond

Market risk premium = 8.6%, risk-free rate = 4.5%, marginal tax rate = 34%

Question 3 - Explain what the best capital structure is when considered that there is no taxes and no bankruptcy costs.