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2. (a) The expected return on the market portfolio is 12% and the standard deviation of its returns is 20%. The risk-free rate of return is 3%. Security X has a standard deviation of returns of 24% and an expected return of 8%. Assume that the Capital Asset Pricing Model holds. i. What is security X's beta? [5 points) ii. Expressed as a standard deviation, what is the idiosyncratic risk of X? [5 points] (b) An all-equity company has stable sales of $1,000,000 per year. Its EBIT margin (i.e., EBIT-to-sales ratio) is 32.5%, capital expenditure margin (i.e., CAPEX-to-sales ratio) is 8%, working capital margin (i.e., WC-to-sales ratio) is 20% and depreciation margin (i.e., DA-to-sales ratio) is 7.5%. All margins are stable, that is, they have not changed in the past and they are not expected to change in the future. Assume that the corporate tax rate is 35% and inflation rate is 0%. If the company's cost of capital is 8%, what is the company worth? [5 points) 2. (a) The expected return on the market portfolio is 12% and the standard deviation of its returns is 20%. The risk-free rate of return is 3%. Security X has a standard deviation of returns of 24% and an expected return of 8%. Assume that the Capital Asset Pricing Model holds. i. What is security X's beta? [5 points) ii. Expressed as a standard deviation, what is the idiosyncratic risk of X? [5 points] (b) An all-equity company has stable sales of $1,000,000 per year. Its EBIT margin (i.e., EBIT-to-sales ratio) is 32.5%, capital expenditure margin (i.e., CAPEX-to-sales ratio) is 8%, working capital margin (i.e., WC-to-sales ratio) is 20% and depreciation margin (i.e., DA-to-sales ratio) is 7.5%. All margins are stable, that is, they have not changed in the past and they are not expected to change in the future. Assume that the corporate tax rate is 35% and inflation rate is 0%. If the company's cost of capital is 8%, what is the company worth? [5 points)

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