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Problem 1

Rasmussen College - BUS 330 - Week 4 Assignment
Problem 1
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
		Year	Stock Price A	Yearly Return (%) Author: Yearly Return = (This year's price - Last year's price) / Last year's price		Stock Price B	Yearly Return (%)
		1	$ 100			$ 65
		2	$ 112	12.0% Author: The first return is calculated for you.	Author: Yearly Return = (This year's price - Last year's price) / Last year's price		$ 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

Problem 2

Rasmussen College - BUS 330 - Week 4 Assignment
Problem 2
2	Assume 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?

Problem 3

Rasmussen College - BUS 330 - Week 4 Assignment
Problem 3
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 $100 million of equity.
	a. Calculate the company's overall cost of capital.
	Cost of Debt:
	Pre-tax Cost of Debt
	Tax Rate
	After-tax Cost of Debt	0.00%
	Cost of Equity:
	Cost of Equity
	Weights:
		Dollar Value ($ in millions)	% Amount
	Debt
	Equity
	Total	$ - 0	0.0%
	Cost of Capital:
	Formula:
		Author: Enter the formula for the cost of capital	Calculation:
		Author: Perform the calculation here	b. What happens to the cost of equity as more debt gets used relative to equity? Why does this occur?