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Expected return on two stocks for two particular market returns: Market Return Aggressive Stock Defensive...

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Finance

Expected return on two stocks for two particular market returns:

Market Return Aggressive Stock Defensive Stock

2% -3% 1%

18% 20% 12%

What are the betas of the two stocks?

What is the expected rate of return on each stock if the market return is 60% likely to be 2% and 40% likely to be 18%?

If the T-bill rate is 4% and the market return is if the market return is 60% likely to be 2% and 40% likely to be 18%, draw the SML for this economy.

Which stock is undervalued and which stock is overvalued? Why?

DEC Inc. recently hired you as a consultant to estimate the companys WACC. You have obtained the following information. (1) The firm's bonds have YTM of 10%. (2) The companys tax rate is 40%. (3) The risk-free rate is 3.5%, the market risk premium is 5.5%, and the stocks beta is 1.25. (4) The target capital structure has a debt-to-equity ratio equals to 1.5. The firm uses the CAPM to estimate the cost of common stock, and it does not expect to issue any new shares. What is its WACC?

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