Corporate Finance Homework 4

Chapter 6:

· Problems (pp. 286-287)

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6-1). Portfolio Beta

· Your investment club has only two stocks in its portfolio. $20,000 is invested in a stock with a beta of 0.7, and $35,000 is invested in a stock with a beta of 1.3. What is the portfolio’s beta?

(6-2). Required Rate of Return

· AA Corporation’s stock has a beta of 0.8. The risk-free rate is 4% and the expected return on the market is 12%. What is the required rate of return on AA’s stock?

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(6-7). Required Rate of Return

· Suppose rRF=5%rRF=5%, rM=10%rM=10%, and rA=12%rA=12%.

a. Calculate Stock A’s beta.

b. If Stock A’s beta were 2.0, then what would be A’s new required rate of return?

 

6-10). Portfolio Required Return

 

· Suppose you manage a $4 million fund that consists of four stocks with the following investments:

Introduction to Financial Management

If the market’s required rate of return is 14% and the risk-free rate is 6%, what is the fund’s required rate of return?

 

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Chapter 9:

(9-2). After-Tax Cost of Debt

· LL Incorporated’s currently outstanding 11% coupon bonds have a yield to maturity of 8%. LL believes it could issue new bonds at par that would provide a similar yield to maturity. If its marginal tax rate is 35%, what is LL’s after-tax cost of debt?

 

9-4). Cost of Preferred Stock with Flotation Costs

· Burnwood Tech plans to issue some $60 par preferred stock with a 6% dividend. A similar stock is selling on the market for $70. Burnwood must pay flotation costs of 5% of the issue price. What is the cost of the preferred stock?

 

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(9-5). Cost of Equity: Dividend Growth

· Summerdahl Resort’s common stock is currently trading at $36 a share. The stock is expected to pay a dividend of $3.00 a share at the end of the year (D1=$3.00)(D1=$3.00), and the dividend is expected to grow at a constant rate of 5% a year. What is its cost of common equity?

(9-6). Cost of Equity: CAPM

· Booher Book Stores has a beta of 0.8. The yield on a 3-month T-bill is 4%, and the yield on a 10-year T-bond is 6%. The market risk premium is 5.5%, and the return on an average stock in the market last year was 15%. What is the estimated cost of common equity using the CAPM?

 

(9-7). WACC

· Shi Import-Export’s balance sheet shows $300 million in debt, $50 million in preferred stock, and $250 million in total common equity. Shi’s tax rate is 40%, rd=6%rd=6%, rps=5.8%rps=5.8%, and rs=12%rs=12%. If Shi has a target capital structure of 30% debt, 5% preferred stock, and 65% common stock, what is its WACC?