Accounting

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1.Below you are presented with hypothetical stock prices for two different stocks over a ten year period.
 a. Calculate the yearly returns for both stocks         
              
              
              
  YearStock Price AYearly Return (%) Stock Price BYearly Return (%)      
              
  1 $          100   $              65       
  2 $          11212.0%  $              70       
  3 $          118   $              79       
  4 $          106   $              83       
  5 $          110   $              80       
  6 $            91   $              95       
  7 $          105   $              94       
  8 $          125   $           108       
  9 $          155   $           120       
  10 $          185   $           125       
              
 b. Calculate the average yearly returns:          
              
              
 c. Calculate the standard deviation:          
              
              
              
 

d. Which if these stocks was less risky?  Explain

2Assume the risk-free rate is 3.5%, the beta of a company is 0.8 and the market-level return is 12%.
              
 a. Provide the CAPM equation and use it to solve for the required return of the company's equity.     
 CAPM Equation:            
              
 Required Return:            
              
 b. Now assume the beta is 1.6.  What is the required return of the company's equity?      
 Required Return:            
              
 

c. What happens as beta increases?

3.Nessumsar compay develops educational materials.  It has a pre-tax cost of debt of 8.0% and a cost of equity of 11.0%.  It has a marginal tax rate of 40%, $50 million of debt and $100 million of equity.
              
 a. Calculate the company's overall cost of capital.         
              
 Cost of Debt:            
 Pre-tax Cost of Debt            
 Tax Rate            
 After-tax Cost of Debt0.00%           
              
 Cost of Equity:            
 Cost of Equity            
              
 Weights:            
  Dollar Value ($ in millions)% Amount          
 Debt            
 Equity            
 Total $                       -  0.0%          
              
 Cost of Capital:            
 Formula:            
              
 Calculation:            
          
         
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