1. P9 = $12 / 15% = $80 => P0= PV = $80 / [ (1 + 15%)9 = $22.

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2. Po = $12,000 / 500 = $24 and Di = $2.00 x (1+20%) = $2.40 => ks = (Di / Po ) + g =

($2.40 / $24) + 10% = 30%

3. Each share needs to be sold at $20. Since ks = 25%, this requires that D = $20 x
ks = $5. // If investors believe that CF would grow @10% per, then we should
have P = $20 = Di / (25% -10%) => Di = $3, D2 = $3.30, D3 = $3.63, and so on
4. We can calculate that µ x =8%, x = 8.51% (9.83% if we, divide by N-l), µy
=8%,y = 8.22% (9.49% if we divide by N-l), ρxy= 0.583. // If we have to invest
in only one stock, we would choose stock Y, since it has the same ERR as X,
but a lower variance (standard deviation). // In that case, the return on our
portfolio would be 8% and the risk as measured by standard-deviation would be
8.22% (9.49% if use N-l). // If we are allowed to put our money in both the
stocks, then we will put 45.73% in X and 54.27% in Y, giving us a portfolio
with the ERR equal to 8% and standard-deviation 7.43% (8.58% if N-l).
5. It is given that RF = 8%; from data, we get average historical-spread kM - RF =
5% => βLB= 0.64 => RRRLB = 8% + (0.64 x 5%) = 11.2% Similarly, βHB = 1.4
=> RRRLB = 8% + (1.4 x 5%) = 15.0%
6. βHumors = (50% x βJoke)+ (50% x βLaughter) = (50% x 1.2) + (50% X 0.8) = 1.00 =>
COC Humors = RRR Humors = kM = 12%
βJoke = 1.2 > 1.0 => KJoke > kM = 12% => NPVproject = ($6000 / ) / KJoke) - $50,000 < 0
βexpansion = (3/4 x βJoke ) + (1/4 x βLaughter ) = (3/4 X 1.2) + (1/4 X 0.8) = 1.1
As kM = 12% & kM - RF = 5%, we get RF = 7% => Kexpansion = 7% + (1.1 x
5%) = 12.5% => NPVexpansion = ($2200/12.5%) - $20,000 = -$2,400 => Don't
go for the expansion