1.   Highlight Answer Please 1. fill in blanks Risk and Return: Introduction Risk is an important concept affecting security prices and rates of return. Risk is the chance that some unfavorable event will occur, and there is a trade-off between risk and return. The higher an investment’s risk, the -__________-lowerhigherequivalentItem 1 the return required to induce investors to purchase the asset. This relationship between risk and return indicates that investors are risk -____________ ambivalentaverseItem 2 ; investors dislike risk and require ________ lowerhigherequivalentItem 3 rates of return as an inducement to buy riskier securities. A -________-risk premiumpar valuecorrelation coefficientItem 4 represents the additional compensation investors require for bearing risk; it is the difference between the expected rate of return on a given risky asset and that on a less risky asset. An asset’s risk can be considered in two ways: On a stand-alone basis and in a portfolio context. 2.   Risk and Return: Stand-Alone Risk Stand-alone risk is the risk an investor would face if he or she held only ________ -one portfolioone assetmultiple assetsCorrect 1 of Item 1 . No investment should be undertaken unless its expected rate of return is high enough to compensate for its perceived ________ riskcostreturnCorrect 2 of Item 1 . The expected rate of return is the return expected to be realized from an investment; it is calculated as the __________ -combined sumstandard deviationweighted averageCorrect 3 of Item 1 of the probability distribution of possible results as shown below: The ________ tighterbroaderCorrect 4 of Item 1 an asset's probability distribution, the lower its risk. Two useful measures of stand-alone risk are standard deviation and coefficient of variation. Standard deviation is a statistical measure of the variability of a set of observations as shown below: If you have a sample of actual historical data, then the standard deviation calculation would be changed as follows: The coefficient of variation is a better measure of stand-alone risk than standard deviation because it is a standardized measure of risk per unit; it is calculated as the____________ correlation coefficientrisk premiumstandard deviationCorrect 5 of Item 1 divided by the expected return. The coefficient of variation shows the risk per unit of return, so it provides a more meaningful risk measure when the expected returns on two alternatives are not _________ -identicaldifferentcorrelatedCorrect 6 of Item 1 . Quantitative Problem: You are given the following probability distribution for CHC Enterprises: State of Economy     Probability   Rate of Return Strong  0.25             19% Normal  0.5               9 Weak       0.25         -4 What is the stock's expected return? Round your answer to 2 decimal places. Do not round intermediate calculations. % ________ What is the stock's standard deviation? Round your answer to two decimal .

1. 1.
Highlight Answer Please
1. fill in blanks
Risk and Return: Introduction
Risk is an important concept affecting security prices and rates
of return. Risk is the chance that some unfavorable event will
occur, and there is a trade-off between risk and return. The
higher an investment’s risk, the
-__________-lowerhigherequivalentItem 1
the return required to induce investors to purchase the asset.
This relationship between risk and return indicates that
investors are risk
-____________ ambivalentaverseItem 2
; investors dislike risk and require ________
lowerhigherequivalentItem 3
rates of return as an inducement to buy riskier securities. A
-________-risk premiumpar valuecorrelation coefficientItem 4
represents the additional compensation investors require for
bearing risk; it is the difference between the expected rate of
return on a given risky asset and that on a less risky asset. An
asset’s risk can be considered in two ways: On a stand-alone
basis and in a portfolio context.
2.
Risk and Return: Stand-Alone Risk
Stand-alone risk is the risk an investor would face if he or she
held only ________
-one portfolioone assetmultiple assetsCorrect 1 of Item 1

2. . No investment should be undertaken unless its expected rate of
return is high enough to compensate for its perceived ________
riskcostreturnCorrect 2 of Item 1
. The expected rate of return is the return expected to be
realized from an investment; it is calculated as the __________
-combined sumstandard deviationweighted averageCorrect 3 of
Item 1
of the probability distribution of possible results as shown
below:
The ________
tighterbroaderCorrect 4 of Item 1
an asset's probability distribution, the lower its risk. Two
useful measures of stand-alone risk are standard deviation and
coefficient of variation. Standard deviation is a statistical
measure of the variability of a set of observations as shown
below:
If you have a sample of actual historical data, then the standard
deviation calculation would be changed as follows:
The coefficient of variation is a better measure of stand-alone
risk than standard deviation because it is a standardized
measure of risk per unit; it is calculated as the____________
correlation coefficientrisk premiumstandard deviationCorrect 5
of Item 1
divided by the expected return. The coefficient of variation
shows the risk per unit of return, so it provides a more
meaningful risk measure when the expected returns on two
alternatives are not _________
-identicaldifferentcorrelatedCorrect 6 of Item 1
.
Quantitative Problem:
You are given the following probability distribution for CHC
Enterprises:

3. State of Economy
Probability Rate of Return
Strong 0.25 19%
Normal 0.5 9
Weak 0.25 -4
What is the stock's expected return? Round your answer to 2
decimal places. Do not round intermediate calculations.
% ________
What is the stock's standard deviation? Round your answer to
two decimal places. Do not round intermediate calculations.
% _______
What is the stock's coefficient of variation? Round your answer
to two decimal places. Do not round intermediate calculations.
_______
3.
Risk and Return: Risk in Portfolio Context
The capital asset pricing model (CAPM) explains how risk
should be considered when stocks and other assets are
held________

4. -by themselvesin portfoliosCorrect 1 of Item 1
. The CAPM states that any stock's required rate of return
is________
less thangreater thanequal toCorrect 2 of Item 1
the risk-free rate of return plus a risk premium that reflects
only the risk remaining
________ afterbeforeCorrect 3 of Item 1
diversification. Most individuals hold stocks in portfolios. The
risk of a stock held in a portfolio is typically
_________ equal tolower thanhigher thanCorrect 4 of Item 1
the stock's risk when it is held alone. Therefore, the risk and
return of an individual stock should be analyzed in terms of how
the security affects the risk and return of the portfolio in which
it is held.
The expected rate of return on a portfolio equals the weighted
average of the expected returns on the assets held in the
portfolio. A portfolio's risk ________
sisn'tCorrect 5 of Item 1
calculated as the weighted average of the individual stock's
standard deviations; the portfolio's risk is generally ________
largersmallerCorrect 6 of Item 1
because diversification _______
raiseslowersCorrect 7 of Item 1
the portfolio's risk.
Two important terms when discussing
________ symmetrydiscountingdiversificationCorrect 8 of Item
1
are correlation and correlation coefficient. Correlation is the
tendency of two variables to move together, while correlation
coefficient is a measure of the degree of relationship between
two variables. If a portfolio consists of two stocks that are
perfectly ________

5. positivelynegativelyCorrect 9 of Item 1
correlated then the portfolio is riskless because the stocks'
returns move counter cyclically to each other. If the returns of
the stocks are perfectly
-________ positivelynegativelyCorrect 10 of Item 1
correlated then the stocks' returns would move up and down
together and the portfolio would be exactly as risky as the
individual stocks. In this situation, diversification would be
completely ________
usefuluselessCorrect 11 of Item 1
for reducing risk. In reality, most stocks are __________
positivelynegativelyCorrect 12 of Item 1
correlated but not perfectly. So, combining stocks into
portfolios reduces risk but does not completely eliminate it.
This illustrates that ________
symmetrydiscountingdiversificationCorrect 13 of Item 1
can reduce risk, but not completely eliminate risk.
Portfolios risk can be broken down into two types. ________
SystematicDiversifiableMarketCorrect 14 of Item 1
risk is that part of a security's risk associated with random
events. It can be eliminated by proper diversification and is also
known as company-specific risk. On the other hand,
_________ unystematicdiversifiablemarketCorrect 15 of Item 1
risk is the risk that remains in a portfolio after diversification
has eliminated all company-specific risk. Standard deviation is
not a good measure of risk when a stock is held in a portfolio. A
stock's relevant risk is the risk that remains once a stock is in a
diversified portfolio. Its contribution to the portfolio's market
risk is measured by a stock's ______
correlation coefficientrisk premiumbeta coefficientCorrect 16 of
Item 1
, which shows the extent to which a given stock's returns move
up and down with the stock market. An average stock's beta is
-________ less thanequal togreater thanCorrect 17 of Item 1

6. 1 because an average-risk stock is one that tends to move up
and down in step with the general market. A stock with a beta
_________
less thanequal togreater thanCorrect 18 of Item 1
1 is considered to have high risk, while a stock with beta
_______ less thanequal togreater thanCorrect 19 of Item 1
1 is considered to have low risk.
Quantitative Problem:
You are holding a portfolio with the following investments and
betas:
StockDollar
investment Beta
A $250,000 1.2
B 100,000 1.5
C 500,000 0.75
D 150,000 - 0.25
Total investment1,000,000
The market's required return is 9% and the risk-free rate is 5%.
What is the portfolio's required return? Round your answer to 3
decimal places. Do not round intermediate calculations.
% ______
4.

7. Risk and Return: Security Market Line
The security market line (SML) is an equation that shows the
relationship between risk as measured by beta and the required
rates of return on individual securities. The SML equation is
given below:
If a stock's expected return plots on or above the SML, then the
stock's return is
_________ insufficientsufficientCorrect 1 of Item 1
to compensate the investor for risk. If a stock's expected return
plots below the SML, the stock's return is
_________ insufficientsufficientCorrect 2 of Item 1
to compensate the investor for risk.
The SML line can change due to expected inflation and risk
aversion. If inflation changes, then the SML plotted on a graph
will shift up or down parallel to the old SML. If risk aversion
changes, then the SML plotted on a graph will rotate up or down
becoming more or less steep if investors become more or less
risk averse. A firm can influence market risk (hence its beta
coefficient) through changes in the composition of its assets and
through changes in the amount of debt it uses.
Quantitative Problem:
You are given the following information for Wine and Cork
Enterprises (WCE):
rRF = 3%; rM = 8%; RPM = 5%, and beta = 1
What is WCE's required rate of return? Round your answer to 2
decimal places. Do not round intermediate calculations.

8. % _________
If inflation increases by 2% but there is no change in investors'
market risk premium, what is WCE's required rate of return
now? Round your answer to two decimal places. Do not round
intermediate calculations.
% ________
Assume now that there is no change in inflation, but market risk
premium increases by 2%. What is WCE's required rate of
return now? Round your answer to two decimal places. Do not
round intermediate calculations.
% ________
If inflation increases by 2% and market risk premium increases
by 2%, what is WCE's required rate of return now? Round your
answer to two decimal places. Do not round intermediate
calculations.
% _______
5.
Problem 6-02
Required Rate of Return
AA Corporation’s stock has a beta of 0.9. The risk-free rate is
3% and the expected return on the market is 12%. What is the
required rate of return on AA's stock? Round your answer to
two decimal places.
% ______

9. 6.
Portfolio Beta
Your retirement fund consists of a $7,500 investment in each of
20 different common stocks. The portfolio's beta is 1.85.
Suppose you sell one of the stocks with a beta of 1.0 for $7,500
and use the proceeds to buy another stock whose beta is 2.25.
Calculate your portfolio's new beta. Do not round intermediate
calculations. Round your answer to two decimal places.
_______
7.
Problem 6-12
Required Rate of Return
Stock R has a beta of 1.4, Stock S has a beta of 0.30, the
expected rate of return on an average stock is 9%, and the risk-
free rate is 6%. By how much does the required return on the
riskier stock exceed that on the less risky stock? Round your
answer to two decimal places.
% ______
8.
Problem 6-13
Historical Realized Rates of Return
Stocks A and B have the following historical returns:

10. Year
A B
2012-17.00% -12.60%
2013 27.25 27.80
2014 16.75 31.30
2015 -3.50 -8.00
2016 30.25 15.25
Calculate the average rate of return for each stock during the 5-
year period. Round your answers to two decimal places.
Stock A % _______
Stock B % ________
Assume that someone held a portfolio consisting of 50% of
Stock A and 50% of Stock B. What would have been the
realized rate of return on the portfolio in each year? What
would have been the average return on the portfolio during this
period? Round your answers to two decimal places.
YearPortfolio
2012 _______ %
2013 ________%
2014 _________%

11. 2015 _________%
2016 _________%
Average return ______%
Calculate the standard deviation of returns for each stock and
for the portfolio. Round your answers to two decimal places.
rA rB Portfolio
Std. Dev. _______% _______% _______%
If you are a risk-averse investor then, assuming these are your
only choices, would you prefer to hold Stock A, Stock B, or the
portfolio?
____________ Stock AStock BPortfolio
9.
Problem 6-14
Historical Returns: Expected and Required Rates of Return
You have observed the following returns over time:

12. Year Stock X Stock Y Market
2012 13% 13% 13%
2013 18 8 12
2014 -16 -3 -11
2015 5 3 3
2016 22 12 13
Assume that the risk-free rate is 4% and the market risk
premium is 7%. Do not round intermediate calculations.
What is the beta of Stock X? Round your answer to two decimal
places.
What is the beta of Stock Y? Round your answer to two decimal
places.
What is the required rate of return on Stock X? Round your
answer to one decimal place.
%
What is the required rate of return on Stock Y? Round your

13. answer to one decimal place.
%
What is the required rate of return on a portfolio consisting of
80% of Stock X and 20% of Stock Y? Round your answer to one
decimal place.
%
10.
Determining the Cost of Capital: Introduction
Companies issue bonds, preferred stock, and common equity to
raise capital to invest in capital budgeting projects. Capital is a
necessary factor of production, and like any other factor, it has
a cost. This cost is equal to the
_________ security analyst'smarginal investor'scompany
vendor'sItem 1
required return on the applicable security. The rates of return
that investors require on bonds, preferred stocks, and common
equity represent the costs of those securities to the firm.
Companies estimate the required returns on their securities,
calculate a weighted average of the costs of their different types
of capital, and use this average cost for capital budgeting
purposes.
The firm's primary financial objective is to
_________ -minimizemaintain the initial level ofmaximizeItem
2
shareholder value. To do this, companies invest in projects that

14. earn
_______-more thanless thanequal toItem 3
their cost of capital. So, the cost of capital is often referred to
as the
_________crossoverhurdleindifferenceItem 4
rate: When calculating the weighted average cost of capital
(WACC), our concern is with capital that must be provided by
-_________managersvendorsinvestorsItem 5
—interest-bearing debt, preferred stock, and common equity.
_________-Notes payableAccounts payableLong-term debtItem
6
and accruals, which arise spontaneously from operations when
capital budgeting projects are undertaken, are not included as
part of total invested capital because they do not come directly
from investors.
Which of the following would be included in the calculation of
the book value of total invested capital? Choose the response
that is most correct.
Notes payable.
Taxes payable.
Retained earnings.
Responses a and c would be included in the calculation of total
invested capital.
None of the above would be included in the calculation of total
invested capital.
The correct response is

15. _________Statement aStatement bStatement cStatement
dStatement eItem
11.
Determining the Cost of Capital: Cost of Debt
A firm's before-tax cost of debt, rd, is the interest rate that the
firm must pay on
_________outstandingsecurednewItem 1
debt. Because interest is tax deductible, the relevant cost of
-Select-outstandingsecurednewItem 2
debt used to calculate a firm's WACC is the
_______-after-taxbefore-taxItem 3
cost of debt, rd(1 – T). The
________after-taxbefore-taxItem 4
cost of debt is used in calculating the WACC because we are
interested in maximizing the value of the firm's stock, and the
stock price depends on
________ after-taxbefore-taxItem 5
cash flows. It is important to emphasize that the cost of debt is
the interest rate on
________outstandingnewItem 6
debt, not
_______outstandingnewItem 7
debt because our primary concern with the cost of capital is its
use in capital budgeting decisions. The rate at which the firm
has borrowed in the past is
_________relevantirrelevantItem 8
because we need to know the cost of
_______ outstandingsecurednewItem 9
capital. For these reasons, the
________ current yield rateyield to maturitycoupon interest
rateItem 10
on outstanding debt (which reflects current market conditions)

16. is a better measure of the cost of debt than the
_________ current yield rateyield to maturitycoupon interest
rateItem 11
. The
______current yield rateyield to maturitycoupon interest
rateItem 12
on the company's
_______longshortItem 13
-term debt is generally used to calculate the cost of debt
because more often than not, the capital is being raised to fund
_______ -longshortItem 14
-term projects.
Quantitative Problem:
5 years ago, Barton Industries issued 25-year noncallable,
semiannual bonds with a $1,700 face value and a 7% coupon,
semiannual payment ($59.5 payment every 6 months). The
bonds currently sell for $845.87. If the firm's marginal tax rate
is 40%, what is the firm's after-tax cost of debt? Round your
answer to 2 decimal places. Do not round intermediate
calculations.
_________%
12
Determining the Cost of Capital: Cost of Preferred Stock
The cost of preferred stock, rps, used in the weighted average
cost of capital equation is calculated as the preferred dividend,
Dps, divided by the current price of the preferred stock, Pps.
_______ANoItem 1
tax adjustment is made when calculating rps because preferred
dividends

17. _______aren'tareItem 2
tax deductible; so
_________thenoItem 3
tax savings are associated with preferred stock.
Quantitative Problem:
Barton Industries can issue perpetual preferred stock at a price
of $51 per share. The stock would pay a constant annual
dividend of $4.30 per share. If the firm's marginal tax rate is
40%, what is the company's cost of preferred stock? Round your
answer to 2 decimal places.
_________ %
13.
Determining the Cost of Capital: Cost of Retained Earnings
The cost of common equity is based on the rate of return that
investors require on the company's common stock. New common
equity is raised in two ways: (1) by retaining some of the
current year's earnings and (2) by issuing new common stock.
Equity raised by issuing stock has a(n)
__________loweridenticalhigherItem 1
cost, re, than equity raised from retained earnings, rs, due to
flotation costs required to sell new common stock. Some argue
that retained earnings should be "free" because they represent
money that is left over after dividends are paid. While it is true
that no direct costs are associated with retained earnings, this
capital still has a cost, a(n)
__________externalityopportunityconfiscatoryItem 2
cost. The firm's after-tax earnings belong to its stockholders,
and these earnings serve to compensate them for the use of their
capital. The earnings can either be paid out in the form of

18. dividends to stockholders who could have invested this money
in alternative investments or retained for reinvestment in the
firm. Therefore, the firm needs to earn at least as much on any
earnings retained as the stockholders could earn on alternative
investments of comparable risk. If the firm cannot invest
retained earnings to earn at least rs, it should pay those funds to
its stockholders and let them invest directly in stocks or other
assets that will provide that return. There are three procedures
that can be used to estimate the cost of retained earnings: the
Capital Asset Pricing Model (CAPM), the Bond-Yield-Plus-
Risk-Premium approach, and the Discounted Cash Flow (DCF)
approach.
CAPM
The firm's cost of retained earnings can be estimated using the
CAPM equation as follows:
rs = rRF + (RPM)bi = rRF + (rM - rRF)bi
The CAPM estimate of rs is equal to the risk-free rate, rRF, plus
a risk premium that is equal to the risk premium on an average
stock, (rM - rRF), scaled up or down to reflect the particular
stock's risk as measured by its beta coefficient, bi. This model
assumes that a firm's stockholders are
________wellsomewhatnot wellItem 3
diversified, but if they are
________wellsomewhatnot wellItem 4
diversified, then the firm's true investment risk would not be
measured by
-Select-growthbetayieldItem 5
and the CAPM estimate would
-________understateoverstateapproximateItem 6
the correct value of rs.

19. Bond-Yield-Plus-Risk-Premium
If reliable inputs for the CAPM are not available as would be
true for a closely held company, analysts often use a subjective
procedure to estimate the cost of equity. Empirical studies
suggest that the risk premium on a firm's stock over its own
bonds generally ranges from 3 to 5 percentage points. The
equation is shown as: rs = Bond yield + Risk premium. Note
that this risk premium is
_______identical todifferent fromItem 7
the risk premium given in the CAPM. This method doesn't
produce a precise cost of equity, but does provide a ballpark
estimate.
DCF
The DCF approach for estimated the cost of retained earnings,
rs, is given as follows:
s = D1/P0 + Expected gL
Investors expect to receive a dividend yield, , plus a capital
gain, gL, for a total expected return. In
-__________recessionsequilibriumupturnItem 8
, this expected return is also equal to the required return. It's
easy to calculate the dividend yield; but because stock prices
fluctuate, the yield varies from day to day, which leads to
fluctuations in the DCF cost of equity. Also, it is difficult to
determine the proper growth especially if past growth rates are
not expected to continue in the future. However, we can use
growth rates as projected by security analysts, who regularly
forecast growth rates of earnings and dividends.

20. Which method should be used to estimate rs? If management has
confidence in one method, it would probably use that method's
estimate. Otherwise, it might use some weighted average of the
three methods. Judgment is important and comes into play here,
as is true for most decisions in finance.
Quantitative Problem:
Barton Industries estimates its cost of common equity by using
three approaches: the CAPM, the bond-yield-plus-risk-premium
approach, and the DCF model. Barton expects next year's annual
dividend, D1, to be $2.10 and it expects dividends to grow at a
constant rate gL = 4.5%. The firm's current common stock price,
P0, is $26.00. The current risk-free rate, rRF, = 4.3%; the
market risk premium, RPM, = 5.6%, and the firm's stock has a
current beta, b, = 1.3. Assume that the firm's cost of debt, rd, is
8.48%. The firm uses a 3.6% risk premium when arriving at a
ballpark estimate of its cost of equity using the bond-yield-plus-
risk-premium approach. What is the firm's cost of equity using
each of these three approaches? Do not round intermediate
calculations. Round your answers to 2 decimal places.
CAPM cost of equity:_______%
Bond-Yield-Plus-Risk-Premium: ________%DCF
cost of equity: _________%
If you are equally confident of all three methods, then what is
the best estimate of the firm’s cost of equity?
_______The best estimate is the highest percentage of the three
approaches.The best estimate is the average of the three
approaches.The best estimate is the lowest percentage of the
three approaches.Item 12

21. 14.
Determining the Cost of Capital: Cost of New Common Stock
If a firm plans to issue new stock, flotation costs (investment
bankers' fees) should not be ignored. There are two approaches
to use to account for flotation costs. The first approach is to add
the sum of flotation costs for the debt, preferred, and common
stock and add them to the initial investment cost. Because the
investment cost is increased, the project's expected return is
reduced so it may not meet the firm's hurdle rate for acceptance
of the project. The second approach involves adjusting the cost
of common equity as follows:
The difference between the flotation-adjusted cost of equity and
the cost of equity calculated without the flotation adjustment
represents the flotation cost adjustment.
Quantitative Problem:
Barton Industries expects next year's annual dividend, D1, to
be $1.70 and it expects dividends to grow at a constant rate gL
= 4.7%. The firm's current common stock price, P0, is $24.40.
If it needs to issue new common stock, the firm will encounter a
5.7% flotation cost, F. Assume that the cost of equity calculated
without the flotation adjustment is 12% and the cost of old
common equity is 11.5%. What is the flotation cost adjustment
that must be added to its cost of retained earnings? Round your
answer to 2 decimal places. Do not round intermediate
calculations.
_________ %
What is the cost of new common equity? Round your answer to
2 decimal places. Do not round intermediate calculations.

22. ________%
15.
Determining the Cost of Capital: Weighted Average Cost of
Capital
The firm's target capital structure is the mix of debt, preferred
stock, and common equity the firm plans to raise funds for its
future projects. The target proportions of debt, preferred stock,
and common equity, along with the cost of these components,
are used to calculate the firm's weighted average cost of capital
(WACC). If the firm will not have to issue new common stock,
then the cost of retained earnings is used in the firm's WACC
calculation. However, if the firm will have to issue new
common stock, the cost of new common stock should be used in
the firm's WACC calculation.
Quantitative Problem:
Barton Industries expects that its target capital structure for
raising funds in the future for its capital budget will consist of
40% debt, 5% preferred stock, and 55% common equity. Note
that the firm's marginal tax rate is 40%. Assume that the firm's
cost of debt, rd, is 7.1%, the firm's cost of preferred stock, rps,
is 6.6% and the firm's cost of equity is 11.1% for old equity, rs,
and 11.98% for new equity, re. What is the firm's weighted
average cost of capital (WACC1) if it uses retained earnings as
its source of common equity? Round your answer to 3 decimal
places. Do not round intermediate calculations.
____%
What is the firm’s weighted average cost of capital (WACC2) if

23. it has to issue new common stock? Round your answer to 3
decimal places. Do not round intermediate calculations.
________%
16
Problem 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 35%, rd = 7%, rps = 8.9%, and
rs = 11%. If Shi has a target capital structure of 30% debt, 5%
preferred stock, and 65% common stock, what is its WACC?
Round your answer to two decimal places.
________%
17
Problem 9-10
Cost of Equity
The earnings, dividends, and stock price of Shelby Inc. are
expected to grow at 8% per year in the future. Shelby's common
stock sells for $26.75 per share, its last dividend was $2.00, and
the company will pay a dividend of $2.16 at the end of the
current year.

24. Using the discounted cash flow approach, what is its cost of
equity? Round your answer to two decimal places.
_______ %
If the firm's beta is 1.5, the risk-free rate is 4%, and the
expected return on the market is 12%, then what would be the
firm's cost of equity based on the CAPM approach? Round your
answer to two decimal places.
________%
If the firm's bonds earn a return of 12%, then what would be
your estimate of rs using the over-own-bond-yield-plus-
judgmental-risk-premium approach? Round your answer to two
decimal places. (
Hint:
Use the midpoint of the risk premium range.)
________%
On the basis of the results of parts a through c, what would be
your estimate of Shelby's cost of equity? Assume Shelby values
each approach equally. Round your answer to two decimal
places.
__________ %
18.

25. Problem 9-15
WACC Estimation
On January 1, the total market value of the Tysseland Company
was $60 million. During the year, the company plans to raise
and invest $20 million in new projects. The firm's present
market value capital structure, here below, is considered to be
optimal. There is no short-term debt.
Debt $30,000,000
Common equity 30,000,000
Total capital $60,000,000
New bonds will have an 6% coupon rate, and they will be sold
at par. Common stock is currently selling at $30 a share. The
stockholders' required rate of return is estimated to be 12%,
consisting of a dividend yield of 4% and an expected constant
growth rate of 8%. (The next expected dividend is $1.20, so the
dividend yield is $1.20/$30 = 4%.) The marginal tax rate is
40%.
In order to maintain the present capital structure, how much of
the new investment must be financed by common equity? Enter
your answer in dollars. For example, $1.2 million should be
entered as $1200000.
$ _______

26. Assuming there is sufficient cash flow for Tysseland to
maintain its target capital structure without issuing additional
shares of equity, what is its WACC? Round your answer to two
decimal places.
________ %
Suppose now that there is not enough internal cash flow and the
firm must issue new shares of stock. Qualitatively speaking,
what will happen to the WACC? No numbers are required to
answer this question.
I.
rs and the WACC will increase due to the flotation costs of new
equity.
II.
rs and the WACC will decrease due to the flotation costs of
new equity.
III.
rs will increase and the WACC will decrease due to the
flotation costs of new equity.
IV.
rs will decrease and the WACC will increase due to the
flotation costs of new equity.
V.
rs and the WACC will not be affected by flotation costs of new
equity.
_________-IIIIIIIVVItem 3