Chapter 11 Problems 11-1, 11-8, 11-9 and 11-20
11-1 Diddy Corp. stock has a beta of 1.2, the current risk-free rate is 5 percent and the expected
return on the market is 13.5 percent. What is Diddys cost of equity?
i e =i f + E [ E ( i M )i f ]
Time Value of Money
4-2: Time Line Show the time line for the $400 cash outflow today, a $518 cash inflow in a
year 3, and a 9 percent interest rate.
4-13: Present Value with Different Discount Rates
Rank the following three stocks by their level of total risk, highest to lowest. Rail Haul has an
average return of 12 percent and standard deviation of 25 percent. The average return and
standard deviation of Idol Staff are 15 percent and 3
Interest Payments Determine the interest payment for the following three bonds: 3 percent
coupon corporate bone (paid semiannually), 4.25 percent coupon Treasury note, and a corporate
zero coupon bond maturing in 10 years. (Assume a $1,000 par value.
8. Explain the shareholder wealth maximization goal of the firm and how it can be measured.
Make an argument for why it is a better goal than maximizing profit. LG 5
Maximizing the shareholders wealth is a goal that only looks to increase the value o