Consider the following scenario analysis concerning stocks and bonds:

STATE OF ECONOMY	PROBABILITY	RATE OF RETURN (%)
		STOCK	BOND
Bad	0.20	--5%	14%
Normal	0.60	15%	8%
Good	0.20	25%	4%

You are required to calculate for both securities:

a) The expected returns [2 marks]

b) The standard deviations [2 marks]

c) The variance [1 marks]

d) The coefficient of variation [1 marks]

Q2.

a) The AL Marai Company has just paid a dividend of $4 per share and this dividend is expected to grow at the rate of 10% every year. The required rate of return is 21%. What is the current market value of the ordinary share? (2 marks)

b) A preference share has a net price of $42 and the preference share pays a $5 dividend. What is the cost of the preference share? (1 mark)

c) A companys debenture has a coupon rate of 16% and the company has a tax rate of 36%, what is the companys cost of debt? (2 marks)

(Rubrics: question 2a and 2c each carry 2 marks for a correct calculation. Question 2b

(RUBRICS: question 1a and 1b carry 2 marks each and Q1c and 1d carry 1 mark each. Total marks are