Calculate the cost of capital of investing in a project with

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1.Suppose the market risk premium is 5% and the risk-free interest rate is 4%. Using the data in Table 10.6, calculate the expected return of investing in

a. Starbucks’ stock.

b. Hershey’s stock.

c. Autodesk’s stock.

2.Given the results to Problem 33, why don’t all investors hold Autodesk’s stock rather than Hershey’s stock?

3.Suppose the market risk premium is 6.5% and the risk-free interest rate is 5%. Calculate the cost of capital of investing in a project with a beta of 1.2.

4.State whether each of the following is inconsistent with an efficient capital market, the CAPM, or both:

a. A security with only diversifiable risk has an expected return that exceeds the risk-free interest rate.

b. A security with a beta of 1 had a return last year of 15% when the market had a return of 9%.

c. Small stocks with a beta of 1.5 tend to have higher returns on average than large stocks with a beta of 1.5.

Reference no: EM13495560

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