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Assignment4 - ACTSC 372 Winter 2009 Assignment 4 Due Monday...

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ACTSC 372 Winter 2009 Assignment 4 Due: Monday 16 March 2009 4.30pm (Beginning of Midterm) All questions are from Ross et al 5th Edition. 1. Exercise 13.6 Lang Cosmetics is evaluating a project to produce a perfume line. Lang currently produces no body- scent products and is an all-equity firm. (a) Should Lang Cosmetics use its stock beta to evaluate the project? (b) How should Lang Cosmetics compute the appropriate beta to evaluate the project? 2. Exercise 13.7 The following table lists possible rates of return on Compton Technology’s stock and debt and on the market portfolio, The probability of each state is also listed. State Probability Return on Return on Return on the Stock (%) Debt (%) Market (%) 1 0.15 4 7 6 2 0.25 9 7 9 3 0.30 19 9 15 4 0.30 16 11 19 (a) What is the beta of Compton Technology debt? (b) What is the beta of Compton Technology Stock? (c) If the debt to equity ratio of Compton Technology is 0.5, what is the asset beta of Compton Technology? Assume no taxes. 3. Exercise 13.20 This is a comprehensive project evaluation problem bringing together much of what you have learned in this and previous chapters. Suppose you have been hired as a financial consultant to Defense Electronics Inc (DEI), a large publicly traded firm that is the market share leader in radar detection systems (RDSs). The company is looking at setting up a manufacturing plant overseas to produce a new line of RDSs. This will be a five year project. The company bought some land three years ago
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