Please take look at the lecture notes in order to answer the follow 3 questions.
Question 1: (Lecture 1)
Suppose Pepsico’s stock has a beta of 0.5. If the risk-free rate is 3% and the market risk premium is 5%, what is Pepsico’s equity cost of capital?
Please write your answer in percentage points with 2 digits after the decimal point.
Question 2: (Lecture 1) [Similar to Example 12.1 in BD.]
Suppose you estimate that the stock of Company A (stock A) has a volatility of 5% and a beta of 1.1, and the stock of company B (Stock B) has a volatility of 20% and a beta of 0.4. The volatility is the standard deviation of the stock’s return.
Which of the following statements are correct? There could be more than one correct statement.
A. Stock A has more market (systematic) risk than Stock B.
B. Stock A has more total risk than Stock B.
C. Company A has a higher equity cost of capital than company B.
Question 3: (Lecture 3)
Consider the second problem in the practice problems for week 1 (starting with the words “Bay Properties”). What will be your answer to part (a) if after year 4 free cash flows will grow at 3.1% per year, forever, and the cost of capital for this division is 12.9%.
[Please round your answer to the nearest dollar.]
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