Consider the following information about two stocks:

$($a$)$ Your portfolio is invested $40$ percent in A and $60$ percent in $B.$ What is the standard

deviation of this portfolio?

$(5$ marks$)$

$($b$)$ Picasso plc has $50$ million $1$ ordinary shares in issue. The stock market closing

price of the shares was $5$ per share yesterday. Early this morning Picasso

announced its intention to raise capital of $20$ million for its new expansion plan to

Latin American Market through a rights issue priced at $2$ each. Peter owns $2,000$

Picasso ordinary shares. Assuming that the rights issue will be the only influence

on the share price.

Evaluate how Peter's wealth will change if he chooses to sell rights.

$(7$ marks$)$

$($c$)$ Discuss Modigliani and Miller's views on capital structure and their assumptions.

$(8$ marks$)$

$($d$)$ Why might firms prefer not to issue new equity? How does the pecking$-$order

theory explain the order in which firms will obtain financing?

$(5$ marks$)$