Question 1:

  1. If you deposit $100 in one year, $200 in two years, and $300 in three years, how much will you have in three years? How much of this is interest? How much will you have in five years if you do not add additional amounts? Assume a 7% interest rate throughout.
  2. Bond has a face value of $100 with coupon rate of 14% paid semi-annually; the bond has 7 years to maturity and the yield to maturity is 16%. What is the bond price? What is the effective annual yield on this bond?
  3. What is the expected return on this portfolio? What is the beta of this portfolio? Does the portfolio have more or less systematic risk than an average asset?
Security Amount invested Expected return Beta
Share A $1,000 8% 0.80
Share B $2,000 12% 0.95
Share C $3,000 15% 1.10
Share D $4,000 18% 1.40


Question 2:

The Star Company has a WACC of 20%. The cost of debt is 12%, which is equal to the risk-free rate of interest. If Star’s debt to equity ratio is 2, Star’s equity beta is 1.5.

Based on the M&M proposition II, what is the beta of the entire firm?


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