1.Suppose MegaChip has a beta of 1.5, whereas Littlewing stock has a beta of .85. If the risk-free interest rate is 3.5% and the expected return of the market portfolio is 12%, according to CAPM:
a. What is the expected return of MegaChip stock?
b. What is the expected return of Littlewing stock?
c. What is the beta of a portfolio of 55% MegaChip and 45% Littlewing stock?
d. What is the expected return of a portfolio of 55% MegaChip and 45% Littlewing stock?
2. Suppose a company is selling an asset for a sale price of $500,000. Four years ago the asset cost $1.5 million to purchase and install. The asset has been depreciated using a 5-year, straight-line depreciation schedule. The firm pays a tax rate of 35%. What is the cash flow from this sale?
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