9. Consider the following information

State Boom Normal Recession

Probability X Z 0.25 15% 10% 0.60 10% 9% 0.15 5% 10%

What are the expected return and standard deviation for a portfolio with an investment of

$6,000 in asset X and $4,000 in asset Z?

10. ABC company plans to sell preferred stock for its par value of birr 25 per share. The

company pays 6 percent of par value as a selling cost. The issuer is expected to pay quarterly dividends of birr 0.60 per share. Calculate the cost of the preferred stock to ABC.

11. On January 1, 2002, the total assets of Ziway Share Company were Br. 54 million. There was no short-term debt. The firms optimal capital structure is given below.

Long-term debt Common equity

Total liabilities and equity

Br. 27,000,000 27,000,000

Br. 54,000,000

New bonds will have a 10% coupon rate and will be sold at Par. Common stock currently has a market price of Br. 60 and can be sold with a flotation cost of Br. 6 per share. Dividend yield is estimated to be 4% and the expected dividend growth rate is 8%

Required: Calculate:

i. the cost of debt assuming s 40% marginal corporate tax rate

ii. the cost of common equity (50% common stock and 50% retained earnings)

9. Consider the following information State Probability X z Boom 0.25 15% 10% Normal 0.60 10% 9% Recession 0.15 5% 10% What are the expected return and standard deviation for a portfolio with an investment of $6,000 in asset X and $4,000 in asset Z? 10. ABC company plans to sell preferred stock for its par value of birr 25 per share. The company pays 6 percent of par value as a selling cost. The issuer is expected to pay quarterly dividends of birr 0.60 per share. Calculate the cost of the preferred stock to ABC 11. On January 1, 2002, the total assets of Ziway Share Company were Br. 54 million. There was no short-term debt. The firm's optimal capital structure is given below. Long-term debt Br. 27,000,000 Common equity 27.000.000 Total liabilities and equity Br. 54.000.000 New bonds will have a 10% coupon rate and will be sold at Par. Common stock currently has a market price of Br. 60 and can be sold with a flotation cost of Br. 6 per share. Dividend yield is estimated to be 4% and the expected dividend growth rate is 8% Required: Calculate: i. ii. iii. the cost of debt assuming s 40% marginal corporate tax rate the cost of common equity (50% common stock and 50% retained earnings) the weighted average cost of capital