Question
I. XYZ Corporation has 45,000 ordinary shares outstanding which are currently selling for 110 per share. The number of preference share outstanding is 30,000 and
I.
XYZ Corporation has 45,000 ordinary shares outstanding which are currently selling for 110 per share.
The number of preference share outstanding is 30,000 and the book value of a share is $100 while the market value is $105. Company has issued 2500 bonds with face value of 1000. Market value of bond is higher than the face value and it is $1,100.
The required rate of return of ordinary shareholders, preference shareholders and bond holders are 10%, 12% and 15% respectively.
The Company is subject to 30% corporate tax.
Based on the information given,
i. Calculate the market value of the firm (4 marks)
ii. Calculate the capital structure weights (2 marks)
iii. calculate the Weighted Average Cost of Capital (WACC) of the company (4 marks)
2.
a. Calculate both the arithmetic and the geometric average return of the following investment
Year 1 2 3 4
Return 10.5% 12.2% -5.5% 2.8%
b. Teena is considering investing in Stock A and stock B. She plans to invest $ 25,000 in the low risk stock and $ 50,000 in the high-risk stock. You have been given following information about these two stocks.
Stock A B
E(R) 15% 10
25% 22%
Correlation between A and B 0.20
Based on the given information, you are required to
i. Calculate the portfolio weights
ii. Calculate the portfolio return.
iii. Calculate the portfolio risk.
iv. Compare portfolio risk with the individual stock risks and identify the benefit of the diversification of the portfolio.
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