Chapter 11

Calculate Expected return standard deviation of the stock A and

the portfolio with 30% in stock A a
Input area:

State Probability Stock A Stock B

Recession 0.25 0.06 (0.20)
Normal 0.55 0.07 0.13
Boom 0.20 0.11 0.33

Output area:

Stock A Probability Stock A Product

0.25 0.06 0.0150
0.55 0.07 0.0385
0.20 0.11 0.0220
0.0755

1.77%

Stock A Probability Stock B Product

0.25 (0.20) (0.05)
0.55 0.13 0.07
0.20 0.33 0.07

0.0875

18.28%
ard deviation of the stock A and stock B. Also calculate standard deviation of
portfolio with 30% in stock A and rest in stock B

Return Deviation Squared deviation Variance

(0.0155) 0.00024 0.0000601
(0.0055) 0.00003 0.0000166
0.0345 0.00119 0.0002381
0.00031

Return Deviation Squared deviation

(0.29) 0.08 0.02
0.04 0.00 0.00
0.24 0.06 0.01
0.03
Chapter 11

You own a stock portfolio invested 20 percent in Stock Q, 30 percent in Stock R

Input area: T. The betas for these four stocks are .75, 1.90, 1.38, and 1.16, resp

Weight of Q 20.00%
Weight of R 30.00%
Weight of S 15.00%
Weight of T 35.00%
Beta of Q 0.75
Beta of R 1.90
Beta of S 1.38
Beta of T 1.16

Output area:

Portfolio beta
Q, 30 percent in Stock R, 15 percent in Stock S, and 35 percent in Stock
.90, 1.38, and 1.16, respectively. What is the portfolio beta?
Chapter 11

Input area:

Stock E(R) 10.40%

Market risk premium 7.00%
Risk-free return 3.80%

Output area:

Stock beta
Chapter 11

Fill in the blanks to create a portfolio with beta as 1

Input area:

Total investment $ 1,000,000

Portfolio beta 1.00

Asset Investment Beta

Stock A $ 190,000 0.83
Stock B $ 325,000 1.19
Stock C 1.45
Risk-free asset

Output area:

Asset Investment Beta

Stock A $ 190,000.00 0.83
Stock B $ 325,000.00 1.19
Stock C 1.45
Risk-free asset
 Shanken Corp. issued $25 million book value 30-year, 5.9
Chapter 13 value
In addition, the company has a second d
the book value of this is
Input Area: What is the company’s total book value of deb

Book value of debt issue ( $ 25,000,000

Settlement 01/01/00 Book value debt issue (2)
Maturity Second issue
Price (% of par) 106 Settlement date
Coupon rate 5.90% Maturity date
Payments per year 2 Annual coupon rate
Tax rate 22% Coupons per year
Market value issue 1 26500000 Bond price (% of par)
Tax rate
Output Area: Market value (issue 2)

Pretax cost of debt issue 1 Output Area:

Aftertax cost of debt issue 1

Book value of debt

Market value of debt
Pretax cost of second issue
Aftertax cost of second issue
Aftertax cost of debt
n book value 30-year, 5.9 percent semiannual bond three years ago. The bond currently sells for 106 percent of its fa
value. The company’s tax rate is 22 percent.
company has a second debt issue on the market, a zero coupon bond with nine years left to maturity;
the book value of this issue is $60 million and the bonds sell for 68 percent of par.
y’s total book value of debt? The total market value? What is your best estimate of the aftertax cost of debt

$ 60,000,000

01/01/00
01/01/09
0%
2
68
22%
$ 40,800,000
ls for 106 percent of its face

o maturity;

tax cost of debt

Chapter 13

Debt
Bonds outstanding 17,000
Settlement date 01/01/00
Maturity date 01/01/20
Annual coupon rate 4.90%
Coupons per year 2
Bond price (% of par) 105
Par value ($) $ 2,000

Common stock
Shares outstanding 425,000
Beta 0.88
Share price $ 67

Market
Market risk premium 7.00%
Risk-free rate 3.50% 2.9990
Tax rate 21%

Output Area:

Market value of debt $ 35,700,000

Market value of equity $ 28,475,000
Market value of firm $ 64,175,000

Pretax cost of debt 4.52%

Aftertax cost of debt 3.57%

Cost of equity 9.66%

WACC 6.27%