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1. Over the past ten years, large-company stocks have

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1. Over the past ten years, large-company stocks have returned 18 percent. The risk premium on these stocks was 3.5 percent and the inflation rate was 3.7 percent. What was the risk-free rate of return? 2. Stock A has a beta of 1.25 and an expected return of 29.59%. A risk-free asset currently earns 6.37%. If a portfolio of the two assets has an expected return of 10.92%, what is the beta of this portfolio? 3. Stock A has an expected return of 13.6 percent and a beta of 1. Stock B has an expected return of 6.7 percent and a beta of 0.4. Both stocks have the same reward-to-risk ratio. What is the risk-free rate? That is, what would the risk-free rate have to be for the two stocks to be correctly priced? 4. You were hired as a consultant to ABC Company, whose target capital structure is 47% in debt, 11% in preferred stock, and remainder in common equity. The before-tax cost of debt is 4.1%, the cost of preferred stock is 8.3%, and the cost of common equity is 12.8%. What is its WACC if the tax rate is 37%? 5. ABC has an unlevered cost of capital (Ra) of 16.06%, a cost of debt of 9.26%. What is the target debt-equity ratio if the targeted cost of equity (Rs) is 20.37%? Assume no taxes. 6. A company has the following financing outstanding: Debt: 189,347 bonds with a quoted price of $846.1 Preferred Stock: 87,358 shares of preferred stock with a current price of $114.2 Common Stock: 202,493 shares of common stock with a current price of $538.5 Compute the weight of preferred stock (Wp) 7. You earned nominal returns of 16.73 percent on your investments for a time period when the risk-free rate was 7.3 percent and the inflation rate was 3.45 percent. What was your real rate of return? 8. 9. Given the following information, what is the expected return for this stock? Economy Probability Return Boom .40 19.36 Normal .30 10.83 Recession .30 2.09 10. ABC is an all-equity firm that has 46,883 shares of stock outstanding at a market price of $24.82 per share. The firm is considering a capital structure with 43% debt at a rate of 6% and use the proceeds to repurchase shares. Determine the shares outstanding once the debt is issued. 11. The 5.17 percent preferred stock of ABC Floors is selling for $83.35 a share. What is the firm's cost of preferred stock if the par value per share is $100? 12. You have a portfolio comprised of the following. What is your portfolio beta? Stock Value Beta A $30,861 2.04 B $24,157 1.22 C $25,124 1.38 D $44,380 1.02 13. The common stock of Josep and Josep has an expected return of 28.62 percent and a beta of 2.2. The expected return on the market is 18.43 percent. What is the risk-free rate? 14. ABC Inc. just paid its first annual dividend of $3.4 a share. The firm plans to increase the dividend by 7.9 percent per year indefinitely. What is the firm’s cost of equity if the current stock price is $38 a share? 15. A firm has a weighted average cost of capital (WACC) of 16.62 percent, and a cost of equity of 22.01 percent. The weight of debt is 63.49%. Assume no taxes. What is the firm’s cost of debt? 16. ABC Corporation is comparing two different capital structures, an all equity plan (Plan I) and a levered plan (Plan II). Under Plan I, ABC would have 79,910 shares of stock outstanding. Under Plan II, there would be 32,389 shares of stock outstanding and $ 532,673 in debt outstanding. The interest rate on debt is 13% and there are no taxes. What is the break-even EBIT? 17. Given the following information, what is the standard deviation for this stock? Economy Probability Return Boom .40 4.85 Normal .30 18.96 Recession .30 -11.89 18. Thomas purchased 4,262 shares of EKK stock for $138,316 one year ago. The stock pays annual dividends of $3.67 a share. Today, each share is worth $32.67. What is Thomas’ total dollar return on this investment? 19. You purchased ABC stock five years ago and have earned annual returns of 12.7 percent, 14.1 percent, 18.9 percent, -11.9 percent and -13.6 percent. What is the geometric average return? 20. ABC has an unlevered cost of capital (Ra) of 16.87%, a cost of debt of 4.21%and a tax rate of 0%.What is the cost of equity for a firm (Rs) with a D/E ratio of 1.04? 21. A portfolio is invested 43.7% in Stock A, 11.2% in Stock B, and the remainder in Stock C. The expected returns are 16.9%, 36%, and 14% respectively. What is the portfolio's expected returns? 22. ABC Company has a cost of equity of 20.08 percent and a pre-tax cost of debt of 9.58 percent. The firm's target weighted average cost of capital is 12.41 percent and its tax rate is 29.33 percent. What is the firm's D/E ratio 23. The risk-free rate is 4.71%, the market risk premium is 8.18%, and the stock’s beta is 0.3. What is the cost of common stock (Ke)? 24. ABC Inc. issued eight-year, 8 percent semi-annual coupon bonds at par. Today, the bonds are priced at $888. What is the firm’s after-tax cost of debt if the tax rate is 38%?