Week 8 Homework You are given the following information for company XYZ:                           Long-term debt outstanding                           = $300,000                         Yield to maturity (rD)                                      = 8 percent                         Number of shares of common stocks             = 10,000                         Price per share                                               = $50                         Book value per share                                     = $25                         Beta of common stock                                    = 1

Week 8 Homework

1. You are given the following information for company XYZ:

                        Long-term debt outstanding                           = $300,000

                        Yield to maturity (r_D)                                      = 8 percent

                        Number of shares of common stocks             = 10,000

                        Price per share                                               = $50

                        Book value per share                                     = $25

                        Beta of common stock                                    = 1.5

                        Expected rate of return on market portfolio   = 12 percent

                        Risk-free rate                                                  = 6 percent

Calculate the weighted-average cost of capital for company XYZ. Assume taxes are equal to zero.

2. The common stock of Glick Toys Inc. has a daily standard deviation of stock price returns of 75 basis points (0.75 percent). On a certain day, call it Day 0, Glick Toys announces the launch of a new product line. You have been asked to evaluate whether the announcement was well received by the market. You decide to take the skills you learned in Core Finance and Data Analysis and perform an event study. The expected return on the market portfolio is two basis points a day (0.02 percent). An abnormal return is considered statistically significant if it is larger than two standard deviations in absolute value.

Based on the stock price movement, what can you conclude about the announcement, and what does it suggest about market efficiency?