1. Working with Uncertainty.

Calculating Returns, Standard Deviations, and

coefficients of variation, based the following information. Compare the riskreturn profiles of A, B and the (Portfolio of A&B), what is the lesson we can
draw from the comparision.

State of
economy
Recession
Normal
Boom
expected
return
Standard
deviation
cov
(stdev /
expected
return)

Probabilit
yof the
state
0.15
0.55
0.3

Rate of Returns
stock A
0.2
0.1
-0.15

stock B
-0.3
0.18
0.31

50% A +
50%B
?
?
?

2. Finding the WACC. Given the following information for Janicek Power Co., find
the WACC. Assume the companys tax rate is 35 percent.
Debt:
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.

tax rate

Debt
Stock
Preferred

before
tax
cost
?
?
?

total value

aftertax
cost
?
?
?

mkt
value
?
?
?

wgt %
?
?
?

wacc

debt
?
?

shares
price

value

value

?
?
?

<-- sum of market value for

each component
<-- sum of cost
components
preferr
ed

stock

shares
price

coupon
rate
par
maturity
# of
payment
per year

after-tax
cost * wgt
cost
compone
nts
?
?
?

?
?
?

beta
rm-rf
rf

?
?
?

requir
ed ret

shares
price

?
?

value

div /
price

price

nper
pmt
pv
fv

?
?
?
?

rate

ytm

ytm * # of
payments per year
Yield
?

cost
from

cost of
preferr

CAPM

ed