(6-5). Expected Return: Discrete Distribution � � � � � � � � � � � � � � � � � � � � � � � � � � � � A stock’s return has the following distribution: � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � (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? � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � (6-7). Required Rate of Return � � � � � � � � � � � � � � � � � � � � � � � � � � � � Suppose rRF=5%rRF=5%, rM=10%rM=10%, and rA=12%rA=12%. � � � � � � � � � � � � � � � � � � � � � � � � � � � Calculate Stock A’s beta. � � � � � � � � � � � � � � � � � � � � � � � � � � � 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: � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � 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? � � � � � � � � � � � � � � (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? � � � � � � � � � � � � � � � � � � � � � � � � � (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?
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