Devry fin 515 week 5 problem set

1. DEVRY FIN 515 Week 5 Problem Set
Check this A+ tutorial guideline at
http://www.homeworkrank.com/f
n-515-devry/fn-515-week-5-
problem-set
For more classes visit
http://www.homeworkrank.com
FIN 515 Week 5 Problem Set
Chapter 10 (pages 345–348)
4. You bought a stock one year ago for $50 per share and sold it
today for $55 per share. It paid a $1 per share dividend today.
a. What was your realized return?
b. How much of the return came from dividend yield and how much
came from capital gain?
20. Consider two local banks. Bank A has 100 loans outstanding,
each for $1 million, that it expects will be repaid today. Each loan
has a 5% probability of default, in which case the bank is not repaid
anything. The chance of default is independent across all the loans.
Bank B has only one loan of $100 million outstanding, which it also
expects will be repaid today. It also has a 5% probability of not
being repaid. Explain the difference between the type of risk each
bank faces. Which bank faces less risk? Why?

2. 22. Consider the following two, completely separate, economies.
The expected return and volatility of all stocks in both economies is
the same. In the frst economy, all stocks move together—in good
times all prices rise together and in bad times they all fall together.
In the second economy, stock returns are independent—one stock
increasing in price has no effect on the prices of other stocks.
Assuming you are risk-averse and you could choose one of the two
economies in which to invest, which one would you choose? Explain.
30. What does the beta of a stock measure?
35. Suppose the market risk premium is 5% and the risk-free
interest rate is 4%. Using the data in Table 10.6 (also shown above),
calculate the expected return of investing in
a. Starbucks’ stock.
b. Hershey’s stock.
c. Autodesk’s stock.
Chapter 11 (pages 390–396):
2. You own three stocks: 600 shares of Apple Computer, 10,000
shares of Cisco Systems, and 5,000 shares of Colgate-Palmolive. The
current share prices and expected returns of Apple, Cisco, and
Colgate-Palmolive are, respectively, $500, $20, $100 and 12%, 10%,
8%.
a. What are the portfolio weights of the three stocks in your
portfolio?
b. What is the expected return of your portfolio?
c. Suppose the price of Apple stock goes up by $25, Cisco rises by
$5, and Colgate-Palmolive falls by $13. What are the new portfolio
weights?
d. Assuming the stocks’ expected returns remain the same, what is
the expected return of the portfolio at the new prices?
50. Suppose Autodesk stock has a beta of 2.16, whereas Costco
stock has a beta of 0.69. If the risk-free interest rate is 4% and the
expected return of the market portfolio is 10%, what is the expected
return of a portfolio that consists of 60% Autodesk stock and 40%
Costco stock, according to the CAPM?
Chapter 12 (page 431):
26. Unida Systems has 40 million shares outstanding trading for $10
per share. In addition, Unida has $100 million in outstanding debt.
Suppose Unida’s equity cost of capital is 15%, its debt cost of
capital is 8%, and the corporate tax rate is 40%.

3. a. What is Unida’s unlevered cost of capital?
b. What is Unida’s after-tax debt cost of capital?
c. What is Unida’s weighted average cost of capital?
27. You would like to estimate the weighted average cost of capital
for a new airline business. Based on its industry asset beta, you
have already estimated an unlevered cost of capital for the frm of
9%. However, the new business will be 25% debt fnanced, and you
anticipate its debt cost of capital will be 6%. If its corporate tax rate
is 40%, what is your estimate of its WACC?