What is the expected return and the standard deviation of returns if over the past four years an investment returned 10.0%, -12.0%, -14.0% and 12.0%?

1. Exp Return ..............................%2. St. Dev = .................................. %

3............................. risk can be diversified away by adding stocks to a portfolio.Words to consider: total, systematic, market, idiosyncratic, equity, volatility.

4. If Treasury bills are yielding 10% at a time when the market risk premium is 6%, then the market

portfolio should be yielding ............................. %

5. What is the beta of a portfolio with an expected return of 14% if Treasury bills yield 5% and the market risk premium is 7%?

Beta = ................................

6. An investor divides her portfolio into thirds: one part in T-Bills, one part in a stock with the beta of 0.8 and one part in a stock with the beta of 1.50.What is the beta of the investor's overall portfolio?Beta = ................................

7. Calculate a firm's approximate WACC given that the debt-to-equity ratio is 3, the cost of debt is 8%, the cost of equity is 15%, and the firm's marginal tax rate is 30%:

WACC = ............................. %

8. Debt financing is desirable because each year taxes are reduced by the amount of ....................... times ............................ and the total value of the firm is increased by the ........................ times ................................

First Three Letters Of Your Last Name

000

Name: ..........................................................

9. What is the present value of the tax shields for a firm that anticipates a perpetual debt level of $20 million at an interest rate of 8% and a tax rate of 30%? The debt/equity ratio is 2. The cost of equity is 15%.PV of debt tax shield = $ ................................

10. What is the expected market risk premium at a time when Treasury bills yield 4% and a stock with a beta of 1.4 is expected to yield 16%?

MRP = ............................ %

11. What return is expected by an investor whose portfolio is 40% market portfolio and 60% Treasury bills if the risk-free rate is 6% and the expected market return is 15%?

ER = .............................. %

12. A stock's beta measures the overall variability of the stock relative to the market. A)TrueB)False

13. Calculate a firm's WACC. The total market value of the firm is $5,000,000. The capital structure consists of debt and equity. The book value of debt is $3,000,000. Debt trades at 120% of par. The cost of debt is 8%, the cost of equity is 15%, the tax rate is 20%.

WACC = ............................... %

14. If one includes taxes into the consideration of Miller-Modigliani Proposition #1, the value of the firm financed only by equity is:A)less than that for a levered firm by the amount of interestB)less than that for a levered firm by the value of the tax shieldC)more than that for a levered firm by the amount of interestD)more than that for a levered firm by the value of the tax shield

15.A firm's book value of debt is $1,000,000. Debt carries 5% annual coupon and matures in 5 years. It trades at 90% of the par value. The company has 100,000 shares outstanding. The book value per share is $4.60 and shares trade at $5.60 on the market. The risk free rate is 6%, the MRP is 8%, and the stock's beta is 1.2. The tax rate is 25%. Compute the capital structure weights and the firm's WACC.

D/V = 0. .......................... E/V = 0. .......................

WACC = .............................. %