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Mark Morris M. Julian 2012-24844 BS Business Administration P8 - 15 a. (1) Range of expected return: between 8% and 13% (2) Range of the risk: between 5% and 10% b. (1) Range of expected return: between 8% and 13% (2) Range of the risk: 0 risk 10% c. (1) Range of expected return: between 8% and 13% (2) Range of the risk: 0 risk 10% P8 - 17 a and b.

HW4 2/24/2015 Agustin

c. Only nondiversifiable risk is relevant because, as shown by the graph, diversifiable risk can be virtually eliminated through holding a portfolio of at least 20 securities that are not positively correlated. David Talbot’s portfolio, assuming diversifiable risk could no longer be reduced by additions to the portfolio, has 6.47% relevant risk. P9 - 16 a. r= ((($1.26(1+0.06)/$40)) + 0.06 = $1.34/$40 = 3.35% + 6% = 9.35% b. r= ((($1.26(1+0.06))/($40-$7)) + 0.06 = $1.34/$33 = 4.06% + 6% = 10.06% c. r= $2/($25-$3) = $2/$22 = 9.09% d. rd= ($100 + (($1000-$1175)/5)/(($1175+$1000)/2) = $65/$1087.5 = 5.98% ri= 5.98% * (1-0.4) = 3.59% e. WACC= (0.40)(3.59%)+(0.10)(9.09%)+(0.50)(9.35%) = 1.436 + 0.909 + 4.675 = 7.02% P9 - 16 a. rd= (($100+(($1000-$950)/10)/(($950+$1000)/2) = ($100+$5)/ $975 = 10.77%

ri= 10.77% * (1-0.4) = 6.46% b. rp= $8/$63 = 12.7% c. Net proceeds= $50-$5-$3 = $42 rn= ($4/$42) + 7% = 16.52% d. WACC: Long-term debt Preferred Stock Common Stock WACC

0.4 * 6.51%= 0.1 * 12.70%= 0.5 * 16.62%=

2.60% 1.27% 8.31% 12.18%

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