Question #1

Portfolio Standard DeviationSecurity F has an expected return of 10 percent and a standard deviation of 44 percent per year. Security G has an expected return of 15 percent and a standard deviation of 65 percent per year. What is the expected return on a portfolio composed of 70 percent of Security F and 30 percent of Security G?

Standard DeviationExpected Return

(70) Security F44%10%

(30) Security G65%15%

Question #2

Calculating WACCJohansen Corporation has a target capital structure of 75 percent common stock and 25 percent debt. Its cost of equity is 12.1 percent, and the cost of debt is 6.3 percent. The relevant tax rate is 35 percent. What is the company's WACC?

Question #3

Preferred Stock and WACCThe Saunders Investment Bank has the following financing outstanding. What is the WACC for the company? Debt: 90,000 bonds with a coupon rate of 6 percent and a current price quote of 106.4; the bonds have 20 years to maturity. 280,000 zero coupon bonds with a price quote of 15.8 and 30 years until maturity. Both bonds have a par value of $1,000. Both bonds have semiannual compounding. Preferred stock: 150,000 shares of 4 percent preferred stock with a current price of $84, and a par value of $100. Common stock: 2,600,000 shares of common stock; the current price is $68, and the beta of the stock is 1.15. Market: The corporate tax rate is 40 percent, the market risk premium is 7 percent, and the risk-free rate is 3.2 percent.