1)

a) If Sterling Corp.'s next dividend on preferred stock is $15 per share and is expected to grow by 3% per year, what must be the discount rate on preferred shares if shares are currently selling for $50 per preferred share?

b) If Klay purchased 35 shares of GSW Inc. for $2 per share and the price fell to $1.50 per share over the year and there was a $.50 per share dividend paid, what is Klay's annual total percentage return on this purchase?

c) If the annual returns over a three-year span from Portfolio A are 10%, 5%, and 3%, what is the geometric average return?

d) A stock currently offers an expected return of 3%. If its estimated beta is 2, the market risk premium is 4% and the risk-free rate is 2%. Is this stock over- or under-valued? What would we expect to happen to this stock's price over time?

2) Suppose the following information reflects a portfolio of stocks. Company Amount Invested Return Last Year Beta
Pencil Corp. -$240 -2% 1.2
Eraser Inc. $420 3% 0.7
Marker Tech $320 9% 1.5

a) What is the expected return on this portfolio?
b) What is the portfolio's market risk?
c) Assuming CAPM holds, if the risk-free rate is 4% and the market return 10%, is the portfolio overvalued or undervalued? Briefly explain.
d) Looking at each stock individually, which one would you say had the best risk-adjusted return last year assuming the 4% risk-free rate and 10% market return? Show calculations to support your answer.
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3)
a) Klieber Industries has committed to providing its shareholders with a 12% return on equity forever. They just began paying annual dividends. They've committed to paying 10% of their net income as dividends for the next 2 years and then they will pay 70% of their net income as dividends after that forever. Calculate the estimated growth rate for the company in the first two
years and after that?

b) Klieber Industries just paid a dividend of $0.50 and the market discount rate is 9%. What is the market price of a share of Klieber Industries now?

4)
a) You bought call options on a stock and the strike price of the option is $17. The option has 1 week until expiration and the stock is currently priced at $22 per share. You paid $3 per call option and bought 30 total. What is your net profit or loss from this exchange assuming nothing changes between now and when the options expire?

b) Based on the information in a), graph a net payoff diagram for one of the call options you purchased. Be sure to label clearly including the break-even point