# 2.According to CAPM the expected return on a risky asset depends on three components. Name and describe each component explaining its role in determining expected return.

**1. **Define liquidity risk, default risk and taxability risk, and explain how these risks relate to bonds and bond yields.

**2. **According to CAPM the expected return on a risky asset depends on three components. Name and describe each component explaining its role in determining expected return.

**3. **Rosie O’Grady spends $98000 a week to pay bills and maintains a lower cask balance limit of $95,000. The standard deviation of the disbursements is $14,600. The applicable interest rate is 4.8% and the fixed cost of transferring funds in $50. What is this firm’s total cost of holding cash based on the BAT model.

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Order Paper Now**Part B: Answer each of the following questions in one to three sentences, and perform calculations as requested. **

**1. **Dandelion Fields has a Tobin’s Q of 0.96. The replacement cost of the firm’s assets is $230,000 and the market value of the firm’s debt is $115,000. The firm has 20,000 shares of stock outstanding and a book value per share of $1.93. What is the market to book ratio?

**2. **Your local travel agent is advertising an upscale winter vacation package for travel three years from now to Antarctica. The package requires that you pay $25,000 today, and a final payment of $45,000 on the day you depart three years from today. What is the cost of this vacation in today’s dollars if the discount rate is 9.75%

**3. **KL Airlines paid an annual dividend of $1.42 a share last month. The company is planning on paying $1.50, $1.75, and $1.80 a share over the next 3 years, respectively. After that, dividend will be constant at $2 per share per year. What is the market price of this stock if the market rate of return is 10.5%

**4. **Champion Bakers uses specialized ovens to bake its bread. One oven costs $689,000 and lasts about 4 years before it needs to be replaced. The annual operating cost per over $41,000. What is the equivalent annual cost of an oven if the required rate of return is 13%?

**5. **Tucker’s trucking is considering a project with a discounted payback period just equal to the project with a discounted payback period just equal to the project’s life. The projections include a sales price of $38, variable cost per unit of $18.50, and fixed cost of $32,000 the operating flow is $19,700. What is the break-even quantity?

**6. **Over the past 15 years, the common stock of the flower Shoppe, Inc., has produced an arithmetic average return of 12.2% and a geometric average return of 11.5% What is the projected return of this stock for the next 5 years according to Blume’s formula?

**7. **Suppose your boss comes to you and asks you to reevaluate a capital budgeting project. The first evaluation was in error, he explains, because it ignored flotation costs. To correct for this, he asks you to evaluate the project using a higher cost of capital which incorporates these costs. Is your boss’s approach correct? Why or Why not?

**8. **Hanover Tech is currently an all equity firm that has 320,000 shares of stock outstanding with a market price of $19 a share. The current cost of equity is 15.4% and the tax rate is 36%. The firm is considering adding $1.2 million of debt with a coupon rate of 8% to its capital structure. The debt will be sold at par value. What is the levered value of the equity?

**9. **Fancy footwear has a line of credit with a local bank in the amount of $80,000. The loan agreement calls for interest of 7% with a compensating balance of 5%, which is the based on the total amount borrowed. The compensating balance will be deposited into an interest-free account. What is the effective interest rate on the loan if the firm needs to borrow $75,000 for one year to cover operating expenses?

**10.** Polly’s home accents currently sells 345 units a month at a price of $59 a unit. Polly thinks she can increase her sales by an additional 55 units if she switches to a net 30 credit policy. The monthly interest is0.4% and the variable cost per unit is $32. What is the net present value of the proposed credit policy switch?