FIN 534 Corporate Finance

Chapter 12

2. Suppose the market portfolio has an expected return of 10% and a volatility of 20%, while Microsoft’s stock has a volatility f 30%.

a. Given its higher volatility, should we expect Microsoft to have an equity cost of capital that is higher than 10%?

b. What would have to be true for Microsoft’s equity cost of capital to be equal to 10%?

5. Using the data in Problem 4, suppose you are holding a market portfolio, and have invested $12,000 in Stock C.

a. How much have you invested in Stock A?

b. How many shares of Stock B do you hold?

c. If the price of Stock C suddenly drops to $4 per share, what trades would you need to make to maintain a market portfolio?

Chapter 12

2. Suppose the market portfolio has an expected return of 10% and a volatility of 20%, while Microsoft’s stock has a volatility f 30%.

a. Given its higher volatility, should we expect Microsoft to have an equity cost of capital that is higher than 10%?

b. What would have to be true for Microsoft’s equity cost of capital to be equal to 10%?

5. Using the data in Problem 4, suppose you are holding a market portfolio, and have invested $12,000 in Stock C.

a. How much have you invested in Stock A?

b. How many shares of Stock B do you hold?

c. If the price of Stock C suddenly drops to $4 per share, what trades would you need to make to maintain a market portfolio?

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