Reference no: EM133058132

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1. The following table shows the one-year return distribution of Startup, Inc. Calculate

a) The expected return.

b) The standard deviation of the return.

2. The last four years of returns for a stock are as follows:

a) What is the average annual return?

b) What is the variance of the stock's returns?

c) What is the standard deviation of the stock's returns?

3. Consider two local banks. Bank A has 100 loans outstanding, each for $1 million, that it expects will be repaid today. Each loan has a 5% probability of default, in which case the bank is not repaid anything. The chance of default is independent across all the loans. Bank B has only one loan of $100 million outstanding, which it also expects will be repaid today. It also has a 5% probability of not being repaid. Explain the difference between the type of risk each bank faces. Which bank faces less risk? Why?

4. Using the data in Problem 10-20, calculate

a) The expected overall payoff of each bank.

b) The standard deviation of the overall payoff of each bank.

5. You need to estimate the equity cost of capital for XYZ Corp. You have the following data available regarding past returns:

a) What was XYZ's average historical return?

b) Compute the market's and XYZ's excess returns for each year. Estimate XYZ's beta.

c) Estimate XYZ's historical alpha.

d) Suppose the current risk-free rate is 3%, and you expect the market's return to be 8%. Use the CAPM to estimate an expected return for XYZ Corp.'s stock.

e) Would you base your estimate of XYZ's equity cost of capital on your answer in part (a) or in part (d)? How does your answer to part (c) affect your estimate? Explain.

6. In mid-2015, Cisco Systems had a market capitalization of $130 billion. It had A-rated debt of $25 billion as well as cash and short-term investments of $60 billion, and its estimated equity beta at the time was 1.11.

a) What is Cisco's enterprise value?

b) Assuming Cisco's debt has a beta of zero, estimate the beta of Cisco's underlying business enterprise.

7. Unida Systems has 40 million shares outstanding trading for $10 per share. In addition, Unida has $100 million in outstanding debt. Suppose Unida's equity cost of capital is 15%, its debt cost of capital is 8%, and the corporate tax rate is 40%.

a. What is Unida's unlevered cost of capital?

b. What is Unida's after-tax debt cost of capital?

c. What is Unida's weighted average cost of capital?

8. You would like to estimate the weighted average cost of capital for a new airline business. Based on its industry asset beta, you have already estimated an unlevered cost of capital for the firm of 9%. However, the new business will be 25% debt financed, and you anticipate its debt cost of capital will be 6%. If its corporate tax rate is 40%, what is your estimate of its WACC?