1. What is the importance of the financial market being efficient? Describe the three levels of informational efficiency and the results of test on the level of efficiency?

2. You have a portfolio that consist of the following securities:
Stock Expected Return Price Number of Shares
AAA 10.5% 55 500
BB 5.00% 25 1000
RAD 12.0% 100 200
FIN 9.00% 75 400
CAT 7.00% 45 900
Given that the risk free rate is 11.95% and the risk premium on the market is 5.5%, what is the beta of the portfolio

3. You have a 401 K plan that has 30 stocks in it and it has a market value of $2,000,000. The beta of the portfolio is 1.1. If you sell $150,000 of a stock that has a beta of 1.4 and replace it with a Stock with a beta of .80, what would the beta of the portfolio be after you complete the transaction?

4. You have been asked to calculate the WACC for a firm. The firm has short-term debt that has a return of 4.50%. The amount outstanding of the short-term debt is $100 million. The firm also has long-term debt that has a par amount of $300 million, a coupon rate of 6.00%, a maturity of 10 years and a yield to maturity of 6.70%. The firm also has 10 million shares outstanding that is currently trading at $50 per share and has a beta of 1.2. In addition the firm has preferred stock that has 2 million shares outstanding, pays an annual dividend of $5.25 per share. It is trading in the market at $78 per share.
The risk free rate is 2.00%, the risk premium on the market is 6.00% and the firms tax rate is 30%. Assume the bonds are semi annual coupons. What is the WACC of the firm?

5. A friend that has a mid-sized company has hired you and she would like to use you as a consultant. She wants you to calculate the WACC for her firm. She gives you the following information:
Debt
The firm has face value of $150,000,000 outstanding of zero coupon debt that has a yield to maturity of 4.20%.
Equity
The firm has stock with 70 million shares outstanding, a tax rate of 35%, and a beta of 1.2. The firm is expected to pay a dividend of $2.40 next year and it is expected to grow by 4% for the foreseeable future. The expected return on the market is 8% and the risk free rate is 1.50%. What is the WACC of the company?

6. The PMBA Corp (beta = 1.3) is trying to determine it cost of equity. You have been asked to give the cost of equity using a variety of methods. The methods to be used are the CAPM, and the DCF model. The risk free rate is 2.00%, and the risk premium on the market is 5.50%. The stock is expected to pay a dividend of $3.00 next year, the stock is trading at $100 per share, the return on equity is 12% and the retention ratio is 80%. You have been told the return for the Small sized portfolio minus the bid-sized portfolio is 3.00%, and the slope coefficient is .3, the high book to market portfolio minus the low book to market value portfolio is -2.00% and the factor weighting (slope) is .4. Calculate the three costs on equity. Explain the different in the results.

1. What is the importance of the financial market being efficient?...