I received $290000 as inherited money from a relative and want to invest this money in financial securities with a 14% return of the money. The A company operates in the dyeing industry for over a decade, and it is an all-equity firm. The company currently 3.5 million shares that are being traded in the market at a price of $7 per share. Recently the company is acquiring a small competitor in the industry for $12 million, and it is expected to generate $2.75 million incremental earnings dividend of $0.5 per share from the next year which are expected to grow at 4% there onwards. Beta must be around 1.4 and the CEO is looking for 35:65 Debt to Equity ratio for the company. Debt can be raised at 8%. The stock of company B is generating returns of 12%,11%13.5%, and 11% for the past four years and is expected to perform well in the future as well. Their beta is around 0.9 The treasury bonds are generating a return of approximately 7%. The corporate tax rate is 29%. What is the cost of the capital of company A when it is an only equity firm? What is the new share price after acquiring the competitor? (4 marks) 2. What is the rate of return after recalibration of the capital structure? What is the return on company Bs Stock? (4 marks) 3. How much money should be invested in each stock to get the desired portfolio return, and it has only 89% of the overall market risk? Now consider the situation when Economy State Probability of Economic State Return Return Return Happy Times Braggs Treasury Boom 0.25 0.25 0.21 0.13 Natural 0.55 0.17 0.11 0.05 Bust 0.2 0.02 0.01 -0.02 4. In the above situation, if I invest 35% in both company A and company B and 30% in the treasury, what would be portfolio return and standard deviation? (5 marks) 5. If the expected T-bill rate is 5.33 percent, find the expected risk premium on the portfolio. (4 marks) 6. Consider that the expected inflation rate is 2.40 percent, what is the expected real returns on the portfolio?