1. Suppose you observe the following situation:

	Standard Deviation	Beta	Expected Return
Stock A	33%	1.2	0.13
Stock B	38%	0.8	0.12
Stock C	30%	1.1	0.11
T-Bill	-	-	0.03 + 0.59

Which one(s) has the highest systematic risk? (Stock A, Stock B, Stock C, Hard to Say)

Which one(s) has the highest unsystematic risk? (Stock A, Stock B, Stock C, Hard to Say)

If Stock C is correctly priced, what is the reward-to-risk ratio (Sharpe ratio) for Stock A and B? Are Stock A and B under-priced?

Reward-to-risk ratio (Company A):

Reward-to-risk ratio (Company B):

Is Company A underpriced?

Is Company B underpriced?

b. Given the following information for Company D, find the WACC. Assume the companys tax rate is 20 percent.

1. Debt: 6,500 5 percent coupon bonds outstanding, $1,000 par value, 3 years to maturity, selling for (101+9) percent of par; the bonds make semiannual payments.
2. Common stock: 300,000 shares outstanding, selling for $52 per share; the beta is 0.95.
3. Preferred stock: 20,000 shares of 6 percent preferred stock outstanding, currently selling for $98 per share.
4. Market: 6 percent market risk premium and 2 percent risk-free rate.