Problem 1: Consider the following information:
Rate of return if state occurs
State of Probability of
Economy State of Economy Stock R Stock S Stock T
Boom .25 .30 .40 .25
Good .40 .10 .15 .10
Poor .25 .00 -.05 -.10
Bust .10 -.25 -.15 -.20
Your portfolio is invested 40% in stock R, 35% in Stock S, and 25% in Stock T. What is the expected return of the portfolio? What is the standard deviation of the return?
Problem 2: Given the following information for Acme Corporation, find the weighted average cost of capital. Assume the company's tax rate is 3 5%.
Debt: 10,000 9 percent coupon bonds outstanding, $ 1,000 par value, 12 years to maturity, selling for 103 percent of par; the bonds make annual payments.
Common stock; 100,000 shares outstanding, selling for $65 per share; beta is .95.
Preferred stock: 15,000 shares of 7.5% preferred stock outstanding, currently selling for $80 per share.
Market: 7 percent market risk premium and 5 percent risk-free rate.
Problem 3: Consider the following financial statement information for the Acme Corporation:
Item Beginning Ending
Inventory $120,000,000 $105,000,000
Accounts receivable 80,000,000 84,000,000
Accounts payable 75,000,000 79,000,000
Net sales $800,000,000
Cost of goods sold 550,000,000
Calculate the operating and cash cycles.