Question

1) You want to create a portfolio equally as risky as the market, and you have...

1)

You want to create a portfolio equally as risky as the market, and you have $2,600,000 to invest. Given this information, fill in the rest of the following table: (Do not round intermediate calculations and round your answers to 2 decimal places, e.g., 32.16.)

Asset Investment Beta
Stock A $ 494,000 1.40
Stock B $ 936,000 1.50
Stock C $ ? 1.60
Risk-free asset $ ? ?

2) The Hudson Corporation’s common stock has a beta of 1.5. If the risk-free rate is 6 percent and the expected return on the market is 10 percent, what is the company’s cost of equity capital?

Cost of equity capital ____ %

3)Suspect Corp. issued a bond with a maturity of 18 years and a semiannual coupon rate of 8 percent 3 years ago. The bond currently sells for 92 percent of its face value. The company’s tax rate is 35 percent.

a. What is the pretax cost of debt? (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.)

Pretax cost of debt             %

b. What is the aftertax cost of debt? (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.)

Aftertax cost of debt             %

c. Which is more relevant, the pretax or the aftertax cost of debt?

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