Question 4: Estimation of the NPV of investment under three demand states.

Demand State	Probability of State	NPV Estimate
Low	20%	$(300,000)
Medium	50%	$200,000
High	30%	$400,000

1. What is the expected NPV for the investment? Who would you interpret the meaning of the expected NPV? Is it a good investment?
2. Assuming that the probability of the median demand state remains 50%, calculate the max probability you can assign to the low-demand state and still have an expected NPV of zero or (Hint: the sum of all probability must be 100%). How does knowing the maximum probability of realizing the low-demand state help you assess the project (no calculations required)?

Question 5: Compute the cost of capital for the firm for the following:

1. A bond that has a $1,000 par value (face value). And a contract or coupon interest rate of 11%. Interest payments are $55 and are paid semiannually. The bonds have a current market value of $1,125 and will mature in 10 years. The firms marginal tax rate is 34%
2. A new common stock issue that paid a $1.80 dividend last year. The firms dividends are expected to continue to grow at 7% per year, forever. The prince of the firms common stock is now $27.50.
3. A preferred stock that sells for $125, pays a 9% dividend, and has $100 pay value.
4. A bond selling to yield 12% where the firms tax rate is 34%