FIN 515 Week 5 Problem Set

2. You own three stocks: 600 shares of Apple Computer, 10,000 shares of Cisco Systems, and 5,000
shares of Colgate-Palmolive. The current share prices and expected returns of Apple, Cisco, and
Colgate-Palmolive are, respectively, $500, $20, $100 and 12%, 10%, 8%.
a. What are the portfolio weights of the three stocks in your portfolio?
b. What is the expected return of your portfolio?
c. Suppose the price of Apple stock goes up by $25, Cisco rises by $5, and Colgate-Palmolive falls by
$13. What are the new portfolio weights?
d. Assuming the stocks’ expected returns remain the same, what is the expected return of the portfolio at
the new prices?
50. Suppose Autodesk stock has a beta of 2.16, whereas Costco stock has a beta of 0.69. If the risk-free
interest rate is 4% and the expected return of the market portfolio is 10%, what is the expected return of a
portfolio that consists of 60% Autodesk stock and 40% Costco stock, according to the CAPM?
Chapter 12 (page 431):
26. Unida Systems has 40 million shares outstanding trading for $10 per share. In addition, Unida has
$100 million in outstanding debt. Suppose Unida’s equity cost of capital is 15%, its debt cost of capital is
8%, and the corporate tax rate is 40%.
a. What is Unida’s unlevered cost of capital?
b. What is Unida’s after-tax debt cost of capital?
c. What is Unida’s weighted average cost of capital?
27. You would like to estimate the weighted average cost of capital for a new airline business. Based on
its industry asset beta, you have already estimated an unlevered cost of capital for the firm of 9%.
However, the new business will be 25% debt financed, and you anticipate its debt cost of capital will be
6%. If its corporate tax rate is 40%, what is your estimate of its WACC?