A. You are an investment analyst and are trying to calculate the cost of capital for company XYZ. You know that the company has a beta of 1.2 and that the risk-free rate is 2%. You also know that the expected return on the market is 8%. The company has 100000 shares on issues that are currently selling for $5 per share. In addition, the company has issued debt with a face value of $400000 that pays 10% coupons annually and has 10 years to maturity. The yield to maturity is 5%. Calculate the weighted average cost of capital. The tax rate is 25%. (15 Marks)

B. What typically happens to the risk of a portfolio as more stocks are added to the portfolio? Why? In your answer make reference to the different types of risk that exist and how they are affected by this process. (5 Marks)