Download 5 Questions for Quiz 6 - Corporate Financial Management | FIN 4360 and more Quizzes Finance in PDF only on Docsity! Finance 4360; Quiz 6; Spring 2008; 2:00 Class Name _________________________________ Note: For any question with numbers, all of the points are earned by setting up solutions. There are no points for any calculations. As a result, you will likely earn a higher grade on this quiz if you simply set up problems but never touch your calculator. “Setting up solutions” may involve writing a single number. 1. Assume that the risk-free rate is 5%, that the expected return on the market portfolio is 12% and that the volatility of the market is 20%. Assume also that Circuit Town has an expected return of 11% and a volatility of 45%. Show graphically the alternative investment to Circuit Town that has the lowest possible volatility while having the same expected return as Circuit Town. Be sure to identify on your graph the risk-free rate, the market portfolio, Circuit Town, and the volatility of your alternative investment. (Note: No calculations are required to solve this problem!) 2. Assume that the risk-free rate is 6% and that the expected return on the market portfolio is 13%. Assume also that the beta of Tiffany is 1.4. Sketch the security market line and Tiffany on a graph of risk and return. Be sure to identify on your graph the risk-free rate, the market portfolio, and the expected return on Tiffany. (Note: No calculations are required to solve this problem!) 3. Assume that the beta of Verizon is 1.2 and that the beta for GreenWal is 0.3. What is the beta of your portfolio if you invest $400,000 in Verizon and $600,000 in GreenWal? Use the following information to answer questions 4 and 5 below. Sirius Black XM Radio has outstanding stock with a market value of $80 million and outstanding risk-free debt with a market value of $20 million. The beta of Sirius’ stock is 1.4 and the expected return and cost of capital on its stock is 12.4%. The risk-free rate is 4%. 4. According to Modigliani and Miller, what would Sirius Black XM’s stock be worth if Sirius Black XM were funded entirely with equity? 5. What would Sirius Black’s equity beta be in number 4?
