Problem 1. Suppose your tax bracket is 20%. Would you prefer to earn a 8% taxable return or a 6% tax-free return? What is the equivalent taxable yield of the 6% tax-free return?
Problem 2. Suppose that HP is currently selling at $25 per share. You buy 500 shares using $7,500 of your own money and borrowing the remainder of the purchase price from your broker. The rate on the margin loan is 6%. If the maintenance margin is 25%, how low can HP's price fall before you get a margin call?
a. What is the expected return of a stock given the following information:
State of Probability Return
Economy
Good .1 15%
Normal .6 13
Poor .3 7
b. What is the standard deviation of returns?
Problem 3. A stock has a beta of 1.5, the risk free rate is 6% and the expected market return is 12%. What is the required rate of return using the CAPM model? If the expected return for the stock is 14.5%, would you recommend purchasing the shares now? Explain your answer in detail.