1) A stock has a beta of 1.08 and has expected rate of return of 11.6 percent. A risk-free asset currently earns 3.6 percent. What is the expected rate of return on a portfolio that is equally invested in the two assets?

A) 12.12%

B) 11.15%

C) 12.24%

D) 11.24%

2) A stock has a beta of 1.08 and has expected rate of return of 11.6 percent. A risk-free asset currently earns 3.6 percent. If a portfolio of the two assets has a beta of 0.50, what are the portfolio weights?

A) 0.46; 0.54

B) 0.63; 0.37

C) 0.57; 0.43

D) None of these

3) A stock has a beta of 1.08 and has expected rate of return of 11.6 percent. A risk-free asset currently earns 3.6 percent. If a portfolio of the two assets has an expected return of 10.5 percent, what is the beta?
A) 0.90

B) 0.93

C) 0.98

D) 0.89

4) A stock has a beta of 1.08 and has expected rate of return of 11.6 percent. A risk-free asset currently earns 3.6 percent. If a portfolio of the two assets has a beta of 2.16, what are the portfolio weights? How do you interpret the weights of the two assets in this case? Explain.

A) 1.50; -0.50

B) 0.82; 0.18

C) 0.65; 0.35

D) 2.00; -1.00

Isabella Construction and Interior Design is an all-equity company in Central Michigan. The CFO John Thornton Jr. is considering moving to a capital structure with 25% debt and 75% equity and using the all the newly raised capital to repurchaseshares of the common stock. The firm’s tax rate is 22%, its current beta is 1.40, and it has 25,000 shares of common stock with a market price of $312 per share. Assume MM propositions hold.
a. How many shares of common stock will remain after the repurchase?
b. If the risk-free rate is 3.5% and the market risk premium is 8.0%, by how much would the cost of equity for the levered firm increase, compared to the cost of equity of the unlevered firm?
c. What will be the change in the WACC, if the company can borrow at 7.25 percent?

An investment bank agrees to underwrite an issue of 18 million shares of stock for Looney Landscaping Corp.

a. The investment bank underwrites the stock on a firm commitment basis, and agrees to pay $10.00 per share to Looney Landscaping Corp. for the 18 million shares of stock. The investment bank then sells those shares to the public for $11.25 per share. How much money does Looney Landscaping Corp. receive? What is the profit to the investment bank? If the investment bank can sell the shares for only $8.25, how much money does Looney Landscaping Corp. receive? What is the profit to the investment bank?

b. Suppose, instead, that the investment bank agrees to underwrite the 18 million shares on a best efforts basis. The investment bank is able to sell 16.5 million shares for $10.00 per share, and it charges Looney Landscaping Corp. $0.325 per share sold. How much money does Looney Landscaping Corp. receive? What is the profit to the investment bank? If the investment bank can sell the shares for only $8.25, how much money does Looney Landscaping Corp. receive? What is the profit to the investment bank?

(For all requirements, enter your answers in dollars, not in millions. Negative amounts should be indicated by a minus sign.)

A company has an 11% WACC and is considering two mutually exclusive investments (that cannot be repeated) with the following cash flows:

1. What is each project's NPV? Negative values, if any, should be indicated by a minus sign. Do not round intermediate calculations. Round your answers to the nearest cent.

   Project A: $  

   Project B: $  

2. What is each project's IRR? Do not round intermediate calculations. Round your answers to two decimal places.

   Project A: %

   Project B: %

3. What is each project's MIRR? (Hint: Consider Period 7 as the end of Project B's life.) Do not round intermediate calculations. Round your answers to two decimal places.

   Project A: %

   Project B: %

4. From your answers to parts a-c, which project would be selected?

If the WACC was 18%, which project would be selected?

4. A loan of $50,000 is to be repaid by 10 annual payments which are made at the beginning of the year. The first 6 payments are $K each and the remaining 4 payments are $2K each. Construct the amortization schedule if the annual effective interest rate is 6%.

In 100 words or less, what does a bond's duration tell an investor about that bond's exposure to risk?

Garvezzi Vineyards is a large winery in Northeast Ohio, and it has been under new ownership for a couple of years now. The new owners are young entrepreneurs who want to expand the product line of wines by introducing wine cocktails, but the efforts have not been successful so far. The owners borrowed heavily from the local banks and currently the winery has a debt-to-equity ratio of 1. The lending experts at First State Bank of Ohio estimate that the winery will be able to maintain the current level of annual cash flows of 10.35 million dollars for the next three years at most. The interest expense for this year is 1.6 million and it will be increasing by 7 percent annually for the next three years. Experts expect that starting in year 4 both cash flows and interest expense will be decreasing by 3 percent a year forever. The combined federal and state tax rate is 24 percent. The unlevered equity cost is 14 percent. Apply the compressed APV approach to determine the value of operations of the winery today.

A. Insurance coverage relies on the law of large numbers, meaning:

A. Events that are statistically difficult to predict for a specific individual are more predictable for a large number of individuals.

B. Events that are statistically difficult to predict for a large number of individuals are more predictable for an individual.

C. Insurers can adequately predict the losses expected for an individual, but are unable to predict the losses expected for large numbers of individuals.

B. Which of the following is not a category of property risk?

A. Loss of value from economic obsolescence.

B. Liability losses resulting from negligent use of property.

C. Loss of property due to fire, wind, theft, or others hazards.

You are the new Director of Development in Goodworks non-profit. You are currently reviewing the internal controls over donations that are sent directly to Goodworks in the form of checks. Your review reveals that the checks are promptly endorsed "For Deposit Only,"but no list of the checks is prepared by the person opening the mail. The mail is opened either by the mailroom employee or by the employee who maintains the accounts receivable records. Mail receipts are deposited in the bank weekly by the manager of Accounts Receivable. Discuss the weaknesses in internal control and your recommendations for improving the system.

Provide information to the discussion that would be informative; elaborate and expand on information

The following information is given about your company. The company needs raise new capital to expand its facilities. The company’s optimum capital structure has been 40% debt, 10% preferred stock and 50% equity. The company will maintain this capital structure in financing this expansion plan. Currently the company's common stock is traded at a price of $15.65 per share. The last dividend paid on the common stock was $1.25 per share. The company will grow at 6% constant rate for long time in the future. The company's preferred stock is selling at $85 and has a quarterly preferred dividend of $1.35. Flotation costs have been estimated at 8% on the common stocks and 5% on the preferred stocks. The company has some bonds with $1000 par value outstanding, the market price of the bonds is $1025, and the bonds have 14 years to maturity. The coupon rate on those bonds is 8% with semi-annual payments. The tax rate is 40%.

What is the WACC for this company if they will issue new common stocks and new preferred stocks?

Why do you think everybody says “Beta is dead"?

Please write in your own words.

You are analyzing the after-tax cost of debt for a firm. You know that the firm’s 12-year maturity, 13.50 percent semiannual coupon bonds are selling at a price of $1,164.40. These bonds are the only debt outstanding for the firm.

What is the current YTM of the bonds? (Round final answer to 2 decimal places, e.g. 15.25%.)

What is the after-tax cost of debt for this firm if it has a marginal tax rate of 34 percent? (Round intermediate calculations to 4 decimal places, e.g. 1.2514 and final answer to 2 decimal places, e.g. 15.25%.)

What is the current YTM of the bonds and after-tax cost of debt for this firm if the bonds are selling at par? (Round intermediate calculations to 4 decimal places, e.g. 1.2514 and final answers to 2 decimal places, e.g. 15.25%.)