Assignment Requirements
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=650,
u=1.3, d=1/u, p=0.7, rf=5.5%, X=550, and T=5. Interpret your results.
2. Discuss the CAPM and its association with the WACC. Illustrate your answer and
support your discussions with relevant research sources.
3. The expected returns on the debt and equity of a levered firm are rE=14.5% and rD=7.5%, 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 appropriate equations and explantions.
5. For your retirement fund, you have decided to place 45% of your contributions into a risk free
asset that pays 3.5% interest per annum, and the remaining 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=9.5%, but will expose you to
risk, measured in terms of an estimated standard deviation of σP=25%. What is your estimate
of the expected return and standard deviation of your complete portfolio, rC and σC,
respectively? Interpret your result.
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 to illustrate your answer and Buffet’s alpha. Support your discussions with relevant
research sources
* Use the PowerPoint in the files only and all the answers from these slides in the power point, please
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