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Devry fin 515 week 5 problem set
1. DEVRY FIN 515 Week 5 Problem Set
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Chapter 10 (pages 345–348)
4. You bought a stock one year ago for $50 per share and sold it
today for $55 per share. It paid a $1 per share dividend today.
a. What was your realized return?
b. How much of the return came from dividend yield and how
much came from capital gain?
20. Consider two local banks. Bank A has 100 loans
outstanding, each for $1 million, that it expects will be repaid
today. Each loan has a 5% probability of default, in which case
the bank is not repaid anything. The chance of default is
independent across all the loans. Bank B has only one loan of
$100 million outstanding, which it also expects will be repaid
today. It also has a 5% probability of not being repaid. Explain
the difference between the type of risk each bank faces. Which
bank faces less risk? Why?
22. Consider the following two, completely separate,
economies. The expected return and volatility of all stocks in
both economies is the same. In the first economy, all stocks
move together—in good times all prices rise together and in
bad times they all fall together. In the second economy, stock
2. returns are independent—one stock increasing in price has no
effect on the prices of other stocks. Assuming you are risk-
averse and you could choose one of the two economies in which
to invest, which one would you choose? Explain.
30. What does the beta of a stock measure?
35. Suppose the market risk premium is 5% and the risk-free
interest rate is 4%. Using the data in Table 10.6 (also shown
above), calculate the expected return of investing in
a. Starbucks’ stock.
b. Hershey’s stock.
c. Autodesk’s stock.
Chapter 11 (pages 390–396):
2. You own three stocks: 600 shares of Apple Computer, 10,000
shares of Cisco Systems, and 5,000 shares of Colgate-Palmolive.
The current share prices and expected returns of Apple, Cisco,
and Colgate-Palmolive are, respectively, $500, $20, $100 and
12%, 10%, 8%.
a. What are the portfolio weights of the three stocks in your
portfolio?
b. What is the expected return of your portfolio?
c. Suppose the price of Apple stock goes up by $25, Cisco rises
by $5, and Colgate-Palmolive falls by $13. What are the new
portfolio weights?
d. Assuming the stocks’ expected returns remain the same,
what is the expected return of the portfolio at the new prices?
50. Suppose Autodesk stock has a beta of 2.16, whereas Costco
stock has a beta of 0.69. If the risk-free interest rate is 4% and
the expected return of the market portfolio is 10%, what is the
expected return of a portfolio that consists of 60% Autodesk
stock and 40% Costco stock, according to the CAPM?
3. Chapter 12 (page 431):
26. Unida Systems has 40 million shares outstanding trading
for $10 per share. In addition, Unida has $100 million in
outstanding debt. Suppose Unida’s equity cost of capital is 15%,
its debt cost of capital is 8%, and the corporate tax rate is 40%.
a. What is Unida’s unlevered cost of capital?
b. What is Unida’s after-tax debt cost of capital?
c. What is Unida’s weighted average cost of capital?
27. You would like to estimate the weighted average cost of
capital for a new airline business. Based on its industry asset
beta, you have already estimated an unlevered cost of capital
for the firm of 9%. However, the new business will be 25% debt
financed, and you anticipate its debt cost of capital will be 6%.
If its corporate tax rate is 40%, what is your estimate of its
WACC?