Delta plc has 1.5 million shares with a total market value of 1.35 million. It has just paid an annual dividend of 9p (0.09) and has constant dividend growth of 5%. It is partly funded by debt. The debteach bond has a face value of 100 and 4 years left to maturityhas a total book value of 1 million. The bonds have a coupon rate of 6% and a yield to maturity of 8%.

(a) Estimate the expected rate of return on equity for Delta plc.

(b) What is the current bond price of Delta plcs debt?

(c) Assume you estimate that a passive portfolio (one invested in a risky portfolio that mimics the S&P 500 stock index) yields an expected rate of return of 13% with a standard deviation of 25%. You manage an active portfolio with expected return 18% and standard deviation 28%. The risk-free rate is 8%.

i. Calculate the slopes of CML and CAL.

ii. Draw the CML and your funds CAL.

iii. What is the advantage of your fund over the passive fund?