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 riskaverse 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 %. 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 firm of 9 %. However , the new business will be 25 % debt financed , 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 ?