As an International Investor, it is important for you to read the latest financial and business news that is occurring around the world. After reading the article below, answer the questions that follow Business article: Capital costs rise on sustainability concerns An intensifying investor focus on sustainable investing and the climate emergency is impacting the oil and gas sector Investors are increasingly focused on the threat of global warming and the need to rapidly decarbonize the global economy, with up to $118tn of funds committed to making climate risk disclosures by 2020, And they are responding by divesting oil and gas holdings, or, at a minimum, fully integrating sustainability into their investment process, driving an incrementally negative view of the sector. Consequently, the sector's weighted average cost of capital (WACC) has risen, causing a valuation derating, reduced capital availability and low market liquidity Question one (1) After reading this article you have been requested to advice an investment group if they should or should not invest in a gas and oil business located in Nigeria, your opinion that you will render will be based on the WACC . Calculate the WACC and give your opinion using the information given below. a) Vision oil and Gas Company has 10 million shares each with a value of $4.20, whose cost is 7.5%. It has $30 million of 5% bonds with a market value of 101.00 and an after-tax cost of 3.5%. It has a bank loan of $5 million whose after-tax cost is 3.2%. It also has 2 million 8% preference shares of $1 whose market price is $1.33 per share and whose cost is 6%. Calculate the WACC ( 5 Marks ) b) Article Assessment of Zambia's capital market integration into the world market is important ingredient when analyzing cost of capital using CAPM. Proponents and supporters of CAPM appear to suggest that it has international application because they are of the opinion that global capital markets are significantly integrated. Therefore, they propose the use of a global or international capital asset pricing model, popularly known as the ICAPM (O'Brien, 1999; Stulz, 1995 and 1999; Schramm and Wang, 1999) to estimate return. This implies that international investors can enter and leave any market anywhere in the world with reasonable certainty and a minimum transaction costs. However, application of the global version of the capital asset pricing model in emerging capital markets has proved impractical and controversial, since these markets are highly segmented and have country specific barriers that minimize their integration to the world markets (Bekaert, 1995; Harvey, 2000; Bekaert and Harvey 2002; Chaieb and Errunza, 2007; etc.) Answer the following questions on CAPM 1. The risk-free rate of return is 4% and the return on the market portfolio is 8.5%. What is the expected return from shares in companies X and Y if: the beta factor for company X shares is 1.25 (2 Marks ) the beta factor for company Y shares is 0.90 ( 2 Marks) = = 2. The return on shares of company A is 11%, but its normal beta factor is 1.10. The risk-free rate of return is 5% and the market rate of return is 8%. Calculate the abnormal return (alpha factor). (6 Marks ) a) Merlo, Inc. maintains a debt-equity ratio of 40 and follows a residual dividend policy. The company has after-tax earnings of $1,600 for the year and needs $1,400 for new investments. What is the total amount Merlo will pay out in dividends this year? L3 Marks) b) You recently purchased a stock that is expected to earn 12 % in a booming economy, 8 % in a normal economy and lose 5 % in a recessionary economy. There is a 15 % probability of a boom, a 75 % chance of a normal economy, and a 10 % chance of a recession. What is your expected rate of return on this stock? [3 Marks) c) Shares are currently selling for $4.4625. At the beginning of the year you bought them for $4.25 and during the year a dividend of 21.25 cents per share was paid. What is the return? | 3 Marks) d) Which one of the following stocks is correctly priced if the risk-free rate of return is 2.5 percent and the market risk premium is 8 percent? [3 Marks) STOCK BETA EXPECTED RETURN 8.2% 13.9% .68 1.42 11.8% 1.23 1.31 .94 12.6% E T 9.7% e) Using the following information, calculate the portfolio beta and expected return: Event Wealth Beta Expected Return Invested K10,000 8% K20,000 12% 15% .80 .95 1.10 K30,000 K40,000 18% 1.40 13 Marks