HW

1. Define systematic (market) and unsystematic (unique) risk. Give two examples for each of them. Which one
is more important and why?
2. Suppose for a project, initial investment is $13,000. The cash flows for next 4 years are $2,000, $4,000,
$6,000 and $9,000. Calculate the net present value (NPV) and IRR of this project. Should you accept the
project?
3. Suppose the Treasury bond rate is 5%, the average return on the S&P 500 index is 12%, and XYZ, Inc. has
a beta of 1.5. According to the CAPM, what should be the required rate of return on XYZ stock?
4. Use the following information to find volatility (standard deviation) and expected return of ABC Company.
Also find coefficient of variation. How do you explain? Which stock is riskier considering both risk and return? 4
Points
States Probability Return
Economy (P) Orl. Utility Orl. Tech
Recession 0.20 4% -10%
Bad 0.10 6% 4%
Normal 0.40 10% 14%
Boom 0.30 14% 30%
5. You bought a bond for $1,100. It has a face value of $1,000 and will mature in 8 years. It gives semi-annual
coupon of 10%. Calculate the YTM of this company.
6. QQ Corp. gives dividend of $6 just few days ago. You believe that the dividend amount will grow at 4%. This
firm’s stock is now selling for $80. What is the cost of capital (discount rate) of QQ Corp’s stock?
7. A firm’s preferred stock is selling for $1,100. Preferred dividend is fixed at $8.5. What is the cost of preferred
capital? 2 points
8. Write down the CAPM equation. Correctly explain the notations used in the equation