1. If the economy booms, RTF, Inc. stock is expected to return 11 percent. If the economy goes into a recessionary period, then RTF is expected to only return 5 percent. The probability of a boom is 64 percent while the probability of a recession is 36 percent. What is the variance of the returns on RTF, Inc. stock?

The answer should be one of the following:

0.000829

0.000884

0.001782

0.000216

0.028016

2. Young & Creative Inc. has a debt-equity ratio of 0.70. The cost of equity is 15 percent and the aftertax cost of debt is 5 percent. What will the firm's cost of equity be if the debt-equity ratio is revised to 0.80?

10.89 percent

11.47 percent

11.70 percent

13.89 percent

15.59 percent