Question

Question 3

An investment earned the following returns for the years 2013 through 2016:20%, 50%, -30%, and 10%. What is the variance of returns for this investment?

a. 0.0892

b. 0.2987

c. 0.1541

d. 0.1092

e. 0.0292

question 4

Al's Audio has a cost of debt of 7 percent, a cost of equity of 12 percent, and a cost of preferred stock of 8 percent. The weight for debt is 0.16, the weight for preferred shares is 0.34, and the weight for common stock is 0.5. The company's tax rate is 34 percent. What is the weighted average cost of capital for Al's Audio Shop?

Select one:

a. 9.68 percent

b. 9.15 percent

c. 9.46 percent

d. 6.54 percent

e. 6.14 percent

Answer 1

1)

First we calculate the mean:

[ 0.2 + 0.5 + (-0.3) + 0.1) / 4 = 0.125

Then we subtract mean from returns, take the square root and add all:

(0.2 - 0.125)² + (0.5 - 0.125)² + ( -0.3 - 0.125)² + (0.1 - 0.125)² = 0.327500

Now e divide by N - 1 = 0.327500 / 4-1 = 0.1092

Variance is 0.1092

b)

Cost of debt = 7% * (1 - tax)

Cost of debt = 0.07 ( 1 - 0.34) = 0.0462 or 4.62%

Weighted average cost of capital = Weight of equity * cost of equity + weight of debt * cost of debt + weight of preferred stock * cost of preferred stock

WACC = 0.5 * 0.12 + 0.16 * 0.0462 + 0.34 * 0.08

WACC = 0.06 + 0.007392 + 0.007392

WACC = 0.09459 or 9.46%