1. Derive the Binomial Pricing model for a leverage firms. Using the Binomial Model that you have derived, find the value of a firm’s levered equity (EL) given the following values: V=600, u=1.4, d=1/u, p=0.6, rf=5%, X=450, and T=3. Interpret your results.

2. Discuss the CAPM and its association with the WACC. Illustrate your answer.

3. The expected returns on the debt and equity of a levered firm are rE=15% and rD=7%, and the current market value of the debt and equity are E=66 and D=44, respectively. What is the firm’s weighted average cost of capital (WACC)? Interpret your result.

4. How could a firm’s ownership structure affect its cost of equity capital? Discuss and support your answer with the appropriate equation.

5. For your retirement fund, you have decided to place 40% of your contributions into a risk free asset that pays 4% interest per annum, and the remaining 60% of your contributions will be placed in an available stock mutual fund that approximates the holdings of the mythical market portfolio. You expect this fund to provide an average return of rP=9%, but will expose you to

risk, measured in terms of an estimated standard deviation of P=20%. What is your estimate of the expected return and standard deviation of your complete portfolio, rC and C, respectively?

6. Discuss the CML and SML and their importance for portfolio analysis. Support your answer with relevant research sources.

7. Discuss the importance of separating alpha and beta for portfolio analysis. Use the Sharpe Ratio and Buffet’s alpha to illustrate your answer. Support your discussions with relevant research sources.

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