43) Both assets B and C plot on the SML. Asset B has a beta of 1.3 and an expect

Question

43) Both assets B and C plot on the SML. Asset B has a beta of 1.3 and an expected return of 13.1%. Asset C has a beta of .50 and an expected return of 7.50%. The risk-free rate is 4% and the expected return on the market portfolio is 11%. If you wish to hold a portfolio consisting of assets B and C, and have a portfolio beta equal to 1.0, what proportion of the portfolio must be in asset B?

A) 0.375

B) 0.50

C) 0.625

D) 0.75

Answer: Show your work

47) The debt-to-equity ratios for Firm 1, Firm 2, Firm 3, and Firm 4 are 0.25, 0.35, 0.35, and 0.45, respectively. The earnings per share for Firm 1, Firm 2, Firm 3, and Firm 4 are $4.5, $3.5, $3, and $2.5, respectively. Generally speaking,which firm is placing fewer burdens on its borrowing?

A) Firm 1

B) Firm 2

C) Firm 3

D) Firm 4

Answer: Show your work

50) You want to invest in a stock that pays $5.00 annual cash dividends for the next four years. At the end of the four years, you will sell the stock for $20.00. If you want to earn 12% on this investment, what is a fair price for this stock if you buy it today?

A) $40.00

B) $43.90

C) $27.90

D) $25.42

Answer: Show your work

Explanation / Answer

43)

x * 0.5 + ( 1 - x ) * 1.3 = 1

0.5x + 1.3 - 1.3x = 1

x = 3/8 = 0.375

Hence A) 0.375

47)

A) Firm A

Because it has lowest debt/equity and highest Earnings per share

50)

fair price is 5/1.12 + 5/1.12^2 + 5/1.12^3 + 5/1.12^4 + 20/1.12^4 = C) $27.90

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