a) You are offered the following investment opportunity: in exchange for $40,000 today, you will receive 2,500 shares of stock in the Ford Motor Company and 10,000 euros today. The current market price for Ford stock is $9 per share and the current exchange rate is $1.50 per €. Should you take this opportunity? Would your decision change if you belived the value of the euro would rise over next month?
b) Suppose you estimate that Wal-Mart’s stock has a volatility of 16,1% and a beta of 0.20. A similar process for Johnson & Johnson yields a volatility of 13.7% and a beta of 0.54. Which stock carries more total risk? Which has more market risk? If the risk-free interest rate is 4% and you estimate the market’s expected return to be 12%, calculate the equity cost of capital for Wal-Mart and Johnson & Johnson. Which company has a higher cost of equity capital?
