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1. Ampex common stock has a beta of 1.4. If the risk free rate is 8 percent, the expected market return is 16 percent, and Ampex has $20 million of 8 percent debt with 10 years until maturity. It has a yield to maturity of 12 percent and a marginal tax rate of 50 %. D/E for the company is 2.0. What is the weighted average cost of capital for Ampex?

2. Show how the following events change the discount rate applicable to an expansion of an existing restaurant chain.
a. The covariance between restaurant sales and the market rate of return increases.
b. The riskless rate decreases
c. Several other companies are planning to expand their chains.

3. Which of the following companies is likely to have a higher beta, and thus a higher cost of capital?
a. An auto manufacturer who runs an assembly line with union workers.
b. A "high-tech" auto manufacturer with a fully automated line requiring only a handful of nonunion workers.