QUESTION 7 4. There are two stocks you are 16.00%, compared to the less risky st

Question

QUESTION 7 4. There are two stocks you are 16.00%, compared to the less risky stock, the riskier stock has io buy Sock A and B Stock A has a beta of09 and Stock B has a bea of 3.7. Treasury-hills have a return rate of2.00% and the market portfolio has a retim of a 35.7% higher expected return. b. 392% lower expected return. c. 392% higher expected return. 0 363% higher expected return. Oe.36S% lower expected return. QUESTION 8 he firm will not be issuing any new stock and be marginal tax rate is 35% what is the weighindave agre agital for American International Group? o C 18.55% Ob, 20.42% c.2050% d. 19.45% e. 18.00% QUESTION 9 a.22.10% 15.20% c. 13.71% 13 86% QUESTION 10 10. The before-tax cost of debt is cost of dest

Explanation / Answer

7.

Stock A expected return = Risk Free Rate + ( Market Return - Risk Free Rate) * Beta

= 2 % + ( 16% -2%) * 0.9

= 14.60%

Stock B expected return = Risk Free Rate + ( Market Return - Risk Free Rate) * Beta

= 2 % + ( 16% -2%) * 3.7

= 53.80%

Hence, the riskier stock (B) has 53.80% - 14.60% higher returns

= 39.20% higher expected return

Hence the correct answer is c. 39.2% higher expected return

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8.

Weighted Average Cost of Capital = Weight of Debt * Cost of Debt + Weight of Equity * Cost of Equity + Weight of Preferred Stock* Cost of Preferred Stock

= 10% * ( 1-35% ) * 30% + 9% * 35% + 41% * 35%

= 19.45%

Hence the correct answer is d.19.45%

9.

expected return = Risk Free Rate + ( Market Return - Risk Free Rate) * Beta

= 4.50% + (11% -4.50%) * 1.60

= 14.90%

Hence the correct answer is d. 14.90%

10 The correct answer is b. higher than

Note : After Tax Cost of Debt = Before Tax Cost of Debt * ( 1- Tax Rate)

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