$(4$ 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$.$c$.,70\%$ 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, hat$(r),$ 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.