State of the EconomyProbabilityRate of Return Stock ARate of Return Stock BRecession.25.05-.19Normal.50.06.14Boom.25.10.34

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Problem 2

Based on the following information, calculate the expected return and standard deviation:

State of the EconomyProbabilityRate of ReturnDepression.15-.107Recession.20.069Normal.40.135Boom.25.215

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Problem 3

A stock has an expected return of 12.4 percent and a beta of 1.37. The market expected return is 10 percent. What must the risk-free rate be?

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Problem 4

King Fisher Aviation has a target capital structure of 72 percent common stock and 28 percent debt. Their cost of equity is 12 percent and the cost of debt is 5 percent. The tax rate is 40 percent. What is King Fisher's WACC?

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Problem 5

King Fisher Aviation issued a 25 year, 6.8 percent semiannual bond 8 years ago. The bond sells today for 110 percent of its face value. The tax rate is 40%.

1. What is the pretax cost of debt?
2. What is the after-tax cost of debt?
3. Which is more relevant, the pretax or the after-tax cost of debt? Why?

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