Question

13 - Now that you have calculated the costs of debt, preferred stock and common stock and found out the weights of the capital structure, please determine the Weighted Average Cost of Capital (WACC) for the company. One hint: remember, you already have figured out the after cost of debt.

14 - You are looking at a possible investment. The following chart shows: the State of the World, the Rate of Return and the Probability that each occurs. Please complete the chart to determine the expected rate of return and the standard deviation of this investment.

State of the World       Rate of Return     Probability    Exp. Rate of Return   Step 2       Step 3

            (A)                            (B)                     (C)                      (D)                       (E)                (F)

Recession                        -63%                   .08                     

Below Avg.                       -11%                   .16          

                                                                                               

Average                            14%                   .51                     

                       

Above Avg.                       29%                   .15                                                         

Boom                                78%                   .10               

Answer 1

(D)

Expected return of investment E(r) =   p(s)*r(s),

where p(s) is the probability of each state,

and r(s) is the expected return of each state.

Variance of investment 2  = p(s)*[r(s) - E(r)]2

where [r(s) - E(r)]2   is the squared deviation from the expected return.

Standard deviation =  variance

expected rate of return = 12.49%

standard deviation = 31.87%

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1 State 2 Recession 3 Below average 4 Average 5 Above average 6 Boom B Return ris p -63% -11% 14% 29% 78% C D E Probability Exp. rate p(s)*[r(s) (s) of return-E(r)]^2 0.08 -0.0504 0.04559 0.16 -0.0176 0.008828 0.51 0.0714 0.000116 0.15 0.0435 0.004089 0.10 0.078 0.042916 Total 12.49% Variance 0.101539 Std.Dev. 31.87%