Homework 3

1. Suppose a stock had an initial price of $88 per share, paid a dividend of $1.90 per share
during the year, and had an ending share price of $73.50. Compute the percentage total
return? What was the dividend yield, What was the capital gains yield?

2. Use the following returns for X and Y. Calculate the average returns, variance, and standard
deviation for stocks X and Y.
 
  Returns
Yea
X Y
r
22.
1    %   29.7% 
9
17.
2  –     –4.9   
9
10.
3        31.7   
9
21.
4       –16.8   
8
5     5.9     35.7   

3. Large-company stocks have average returns of 11.8% and standard deviation of 20.3 %.
What range of returns would you expect to see 68 percent of the time for large-company
stocks? What about 95% of the time?

4. A stock has had returns of −26 percent, 6 percent, 34 percent, −5 percent, 28 percent, and 19
percent over the last six years. What are the arithmetic and geometric returns for the stock?
5. What are the portfolio weights for a portfolio that has 120 shares of Stock A that sell for $81
per share and 95 shares of Stock B that sell for $70 per share?
6. You own a portfolio that has $3,100 invested in Stock A and $4,200 invested in Stock B.
Assume the expected returns on these stocks are 11 percent and 17 percent, respectively.
What is the expected return on the portfolio?
7. A stock has a beta of 1.21, the expected return on the market is 11.5 percent, and the risk-
free rate is 4.7 percent.What must the expected return on this stock be?
8. You own a stock portfolio invested 27 percent in Stock Q, 17 percent in Stock R, 43 percent in
Stock S, and 13 percent in Stock T. The betas for these four stocks are .96, 1.02, 1.42, and 1.87,
respectively. What is the portfolio beta?
9. A stock has an expected return of 11.2 percent, its beta is .87, and the risk-free rate is 5.6
percent. What must the expected return on the market be?

10. Consider the following information: Calculate the expected return.

 
State of Probability of State Rate of Return
Economy of Economy if State Occurs
Recession   .23   –.10  
Normal   .46    .12  
Boom   .31    .31  

 
11. Stock J has a beta of 1.35 and an expected return of 13.91 percent, while Stock K has a beta
of .90 and an expected return of 10.85 percent. You want a portfolio with the same risk as the
market. What is the portfolio weight of each stock? What is the expected return of your
portfolio?
12. A stock has a beta of 1.26 and an expected return of 12.4 percent. A risk-free asset currently
earns 4.1 percent.
a. What is the expected return on a portfolio that is equally invested in the two assets?
b. If a portfolio of the two assets has a beta of .86, what are the portfolio weights?
c. If a portfolio of the two assets has an expected return of 11.6 percent, what is its
beta?
13. Thompson Corporation has a target capital structure of 70% common stock, 10% preferred
stock, and 20% debt. Its cost of common stock is 10.9%, the cost of preferred stock is 5%, and
the pretax cost of debt is 5.4%. The relevant tax rate is 25%. What is the company’s WACC?

14. Fama’s Llamas has a WACC of 9.8 percent. The company’s cost of equity is 12.2 percent, and
its pretax cost of debt is 7.4 percent. The tax rate is 40 percent. What is the company’s debt–
equity ratio?

15. Titan Corp has 1,000,000 shares of common stock outstanding at $55 per share. It’s beta is
0.9. They have 150,000 shares of preferred stock outstanding at $99 per share and it pays a
$4.00 dividend. They have 60,000 bonds outstanding with a price of 110, par of $1000, coupon
of 5%, and YTM of 4%. The return on the market is 11% and TBills return 4%. The company
pays 30% in taxes. What is the WACC?