16. The returns on shares of company A and B vary depending on the state of economic growth. State of the economy Probability Return on A Return on B . RA (%) R. (%) Boom 20 3 Growth 0.4 10 35 Recession 0.3 0 -5 0.3 a). Calculate expected return and standard deviation of company A shares. (2 marks) b). Calculate expected return and standard deviation of company B shares. (2 marks) c). What are the covariance and the correlation coefficient between returns on A and returns on B? (1 mark) 17. Dhofar International is financed through bonds and ordinary shares. The bonds were issued five years ago at a par value of OMR100 (total funds raised OMR 6 million). They carry an annual coupon of 11 per cent, are due to be redeemed in four years and are currently trading at OMR110. The company's shares have a market value of OMR 5 million, the return on risk-free government securities is 8 percent and the risk premium for an average-risk share has been 6%. Dhofar International shares have a lower than average risk and its historic beta as measured by the co-movement of its shares and the market index correctly reflects the risk adjustment necessary to the average risk premium - this is 0.80. The corporate tax rate is 35%. Dhofar International has a net asset figure of OMR 4.5m showing in its balance sheet. Required a). Calculate the cost of debt capital. (Try 7% and 8%) (2.5 marks) b). Calculate the cost of equity capital. (1 mark) c). Calculate the weighted average cost of capital. (1.5 marks)