Sample Test 2(3)

# Sample Test 2(3) - Math 3650 Sample Test 2 Note The real...

• Test Prep
• 7
• 100% (1) 1 out of 1 people found this document helpful

This preview shows pages 1–3. Sign up to view the full content.

Math 3650 Sample Test 2 Note: The real test will contain short answer type questions in addition to these types of problems. 1. Given the following data for a company: Debt (D) = \$400 million; Equity (E) = \$600 Million; D r = 6%; E r = 15% and corporate tax rate = 35%. Calculate the weighted average cost of capital (WACC): Solution 1 400 600 0.06 1 0.35 0.15 400 600 400 600 10.56% WACC D E x D E r r t r D E D E 2. The expected return of the stock market is 9% The volatility of the stock market is 17.0% The expected return of your firm’s stock is 15% The volatility of your firm’s returns is 35% The covariance of your firm’s stock and the market is 3.468% Calculate your firm’s Beta Answer: Beta = Cov(firm,market)/Var(market) = .03468/(.17*.17) = 1.2 Or can do it this way: ( ) ( , ) ( ) xyz xyz mkt mkt Vol R Corr R R Vol R ( , ) ( , ) ( ) ( ) xyz mkt xyz mkt xyz KT Cov R R Corr R R Vol R Vol R Corr=.03468/(.35*.17)=.582857 .35 .582857 1.2 .17

This preview has intentionally blurred sections. Sign up to view the full version.

3. Use this information to answer the next three questions. The risk free rate is 4% and the expected return of the stock market is 9%. Based on a statistical analysis, you determined the volatility and beta for Exxon-Mobil and Merck to be: Stock Volatility Beta Exxon-Mobil 28% 0.9 Merck 24% 1.1 a. Which stock has the highest total risk? Answer: Exxon Mobil, since it has the highest volatility b. Which stock has the highest systematic risk? Answer: Merck, since it has the higher Beta c. If you were the Chief Financial Officer at Exxon Mobil, what is the cost-of-capital you would use to decide whether or not to pursue a project, using the principles of the Capital Asset pricing Model?
This is the end of the preview. Sign up to access the rest of the document.
• Spring '14
• Trimble,J

{[ snackBarMessage ]}

### What students are saying

• As a current student on this bumpy collegiate pathway, I stumbled upon Course Hero, where I can find study resources for nearly all my courses, get online help from tutors 24/7, and even share my old projects, papers, and lecture notes with other students.

Kiran Temple University Fox School of Business ‘17, Course Hero Intern

• I cannot even describe how much Course Hero helped me this summer. It’s truly become something I can always rely on and help me. In the end, I was not only able to survive summer classes, but I was able to thrive thanks to Course Hero.

Dana University of Pennsylvania ‘17, Course Hero Intern

• The ability to access any university’s resources through Course Hero proved invaluable in my case. I was behind on Tulane coursework and actually used UCLA’s materials to help me move forward and get everything together on time.

Jill Tulane University ‘16, Course Hero Intern