1. Working with Uncertainty. Calculating Returns, Standard Deviations, and coefficients of variation, based the following information. Compare the risk-return profiles of A, B and the (Portfolio of A&B), what is the lesson we can draw from the comparision.
State of economy Probabilityof the state Rate of Returns
stock A stock B 50% A + 50%B
Recession 0.15 0.2 -0.3 ?
Normal 0.55 0.1 0.18 ?
Boom 0.3 -0.15 0.31 ?
expected return ? ? ?
Standard deviation ? ? ?
cov (stdev / expected return) ? ? ?
2. Finding the WACC. Given the following information for Janicek Power Co., find the WACC. Assume the company’s tax rate is 35 percent.
o 9,500 of 7 percent coupon bonds outstanding, $1,000 par value, 25 years to maturity, selling for 118 percent of par; the bonds make semiannual payments.
• Common stock:
o 200,000 shares outstanding, selling for $87 per share; beta is 1.25.
o 7 percent market risk premium and 3.1 percent risk-free rate.
• Preferred stock:
o 15,000 shares of 4.8 percent preferred stock outstanding, currently selling for $100 per share.
after-tax cost * wgt
before tax cost after-tax cost mkt value wgt % cost components
Debt ? ? ? ? ?
Stock ? ? ? ? ?
Preferred ? ? ? ? ?
total value ? <– sum of market value for each component
wacc ? <– sum of cost components
debt stock preferred
shares ? shares ? shares ?
price ? price ? price ?
value ? value ? value ?
coupon rate ? beta ? div / price ?
par ? rm-rf ?
maturity ? rf ?
# of payment per year ?
price ? required ret ?
ytm * # of payments per year
Yield ? cost from CAPM ? cost of preferred ?
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