R=6+1.44(14-6)=17.52%WACC = .65(14)+.35(8)(.6)=10.78%OCF= ((230-200)(35000)-300,000)(1-.38)+300,000(.38)=579,000Q=(300,000+300,000)/(230-200)=20,000Rs = 4+1.2(12-4)=13.6%Rp=9/83=10.84%S=54*1,400,000=75,600,000E(Rm)=9.75%; E(Rd)=15%Variance = 121.1876Covariance (Rm, Rd) = 180; Beta = 180/121.1876 = 1.4853Rd=3+1.4853(9.75-3)=13.0258%1. Which of the following stocks is (are) incorrectly priced if the risk-free rate is 4% and the market risk premium is 6%? (10 points)Stock A B CBeta 1.25 0.80 1.06Expected Return 12.6% 8.8% 11.2%E(RA)=4+1.25*6=11.5% under pricedE(RB)=4+0.80*6=8.8% correctly pricedE(RC)=4+1.06*6=10.36% under priced2. The risk-free return is 6% and the expected market return is 14%. The market standard deviation is 20% and the standard deviation for Acme Meat Company is 36%. The correlation between the market and Acme returns is 0.80. (10 points)a. What is the beta for shares of Acme?=(0.8*0.36)/0.20 = 1.44b. What is the required return on Acme’s stock?R=6+1.44(14-6)=17.52%3. Exxon Mobil’s required return for equity is 14%. Its required return for debt is 8%, its debt-to-total value ratio is 35% and its marginal tax rate is 40%. CalculateExxon Mobil’s WACC. (5 points)WACC = .65(14)+.35(8)(.6)=10.78%4. The S&P 500 index returns of common stocks for the period 1981-1985 are as follows. Calculate the five-year holding-period return. (5 points)1981 1982 1983 1984 1985S&P 500 Return -4.96 22.45 23.76 7.27 32.16(0.9504)(1.2245)(1.2376)(1.0727)(1.3216)=2.04182.0418-1=104.18%5. Consider a project to supply Detroit with 35,000 tons of machine screws annually for automobile production. You will need an initial $1,500,000 investment in threading equipment to get the project started; the project will last for five years. The accounting department estimates that annual fixed costs will be $300,000 andthat variable costs should be $200 per ton; accounting will depreciate the initial fixed asset investment straight-line to zero over the five-year project life. It also estimates a salvage value of $500,000 after dismantling costs. The marketing department estimates that the automakers will get the contract at a price of $230 per ton. The engineering department estimates you will need an initial net working capital investment of $450,000. You require a 13 percent return and facea marginal tax rate of 38 percent on this project. (20 points)a. What is the estimated operating cash flow for this project?OCF= ((230-200)(35000)-300,000)(1-.38)+300,000(.38)=579,000b. What is the NPV? Is the project acceptable?CF0=-1,500,000-450,000=-1,950,000CF(SV)=500,000-(500,000-0)(.38)=310,000CF1=CF2=CF3=CF4=579,000, CF5=1,339,000NPV=498,974.45 YESc. What is the accounting breakeven quantity?Q=(300,000+300,000)/(230-200)=20,000d. What is the financial breakeven quantity?NPV = 0=-1,950,000+OCF*PVIF+760,000PVIF;(PV=-1,950,000, I=13, n=5,FV=760,000, PMT=?=OCF); OCF = 437,134.31437,134.31=[30Q-300,000](1-.38)+300,000(.38); Q=27,372.816. Taylor Enterprises has 12,000 bonds outstanding that have a 6% coupon rate. The bonds are selling at 98% of face value ($1,000), pay interest semi-annually, and mature in 28 years. The bonds are yielding 6.15%. There are 400,000 shares of 9% preferred stock (parvalue $100) outstanding with a current market price of $83 a share. In addition, there are 1.40 million shares of common stock outstanding with a market price of $54 and a beta of1.2. The firm’s marginal tax rate is 34%. The overall stock market is yielding 12% and the U.S. Treasury bill rate is 4.0%. (20 points)a. What is the cost of equity?Rs = 4+1.2(12-4)=13.6%b. What is the cost of financing using preferred stock?Rp=9/83=10.84%c. What is the pre-tax cost of debt financing?6.15% (given)d. What is the weighted average cost of capital?S=54*1,400,000=75,600,000P=83*400,000=33,200,000B=980*12000=11,760,000S+B+P=120,560,000WACC = .6271(13.6)+.2754(10.84)+0.0975(6.15)(1-.34)=11.91%7. Give the following data answer the questions below: Economic StateProbability of StateReturn on MarketReturn onDallas Inc.Risk-freeRateStagnant 0.20 -10% -15% 3%Slow growth 0.35 10% 15% 3%Average 0.30 15% 25% 3%Rapid growth 0.15 25% 35% 3%a. Calculate the expected returns on the stock market and on Dallas Inc. stock. (10 points)E(Rm)=9.75%; E(Rd)=15%b. What is the variance of the market? (5 points)Variance = 121.1876c. What is the standard deviation of a portfolio invested 50% in the market and 50% in the risk free asset? (5 points)Variance = .52(121.1876) = 30.2969; Std Dev = 5.5043%d. What is Dallas Inc.’s beta? (5 points)Covariance (Rm, Rd) = 180; Beta = 180/121.1876 = 1.4853e. What is Dallas Inc.’s required return according to the CAPM? (5