$(4$ marks$)$ Question $6($cost of capital and capital structure determination$)$

a$)$ A firm borrows money at $9\%$ interest after taxes and pays $11\%$ for equity. The company

raises capital in equal proportions, i$.$e$.,70\%$ debt and $30\%$ equity. Determine the

Weighted Average Cost of Capital $($WACC$)$ of the Firm.

b$)$ Determine the cost of common equity. The current market price of stock is SR $200,$ and

the stock pays Expected dividend of SR$8$ with a growth rate of $5\%.$

c$)$ Determine the cost for a preferred stock that pays annual dividend SR $6,$ has issue price

SR $40,$ and incurs flotation costs of SR $3$ per share.

$(2\mathrm{.}5$ marks$)$ Question $7($Cost of capital and capital structure determination$)$

Stocks $x$ and $Y$ have the following probability distributions of expected future returns:

a$)$ Calculate the expected rate of return, widehat$(r),$ for Stock $Y.$ Return for Stock $x,($ hat$(r{)}_x=12\%),$

b$)$ Calculate the standard deviation of expected returns for Stock $x.($That for Stock $Y$ is

$20\mathrm{.}35$ percent.$)$

$(2\mathrm{.}5$ marks$)$ Question $8($Risk & Return$)$

Using the CAPM, estimate the appropriate required rate of return for the following three

stocks, given that the risk$-$free rate is $5$ percent, and the expected return for the market is $17$

percent.

$\frac{?}{\text{b}\text{a}\text{r}}($ FIN$220(Assignment))$

$(4$ marks$)$ Question $9($Capital Budgeting$)$

ABC Company is considering a new product line to supplement its range line. It is anticipated

that the new product line will involve cash investment of $$700,000$ at time $0$ and $$1\mathrm{.}0$ million in

year $1.$ After$-$tax cash inflows of $$250,000$ are expected in year $2,$$$300,000$ in year $3,$$$350,000$

in year $4,$ and $$400,000$ each year thereafter through year $10.$ Though the product line might be

viable after year $10,$ the company prefers to be conservative and end all calculations at that

time.

a$)$ If the required rate of return is $15$ percent, what is the net present value $($NPV$)$ of the

project? Is it acceptable?

b$)$ What is its profitability index $($PI$)$ of the project?

c$)$ What would be the case if the required rate of return was $10$ percent?

d$)$ What is the project's payback period? Is it acceptable?

e$)$ Briefly compare and contrast the NPV$,$ PI$,$ and IRR criteria. What are the advantages and

disadvantages of using each of these methods?