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List Q4 answers steps 3. a) ABC is an all-equity financed firm with total asset of 400m. Corporate tax rate is 25%. XYZ is an
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3. a) ABC is an all-equity financed firm with total asset of 400m. Corporate tax rate is 25%. XYZ is an otherwise identical firm, but with 150m of its 400m assets financed with debt bearing an interest rate of 8%. Given that the EBIT in the bad, normal and good year scenarios are 10 million, 20 million and 30 million respectively, calculate the ROE under the three scenarios for both firms. (10 marks) b) Which firm has a more volatile ROE? Why? (2.5 marks) 4. a) It is found that the systematic risk measure beta, the annualised Jensen's alpha and the standard deviation of unsystematic shocks of stock A are 0.8, 1% and 10% respectively. If the expected return and standard deviation of the market portfolio are 5% and 10% per annum respectively, use the single-index model to construct the optimal portfolio that comprises the market portfolio and the stock A. (8.5 marks) b) If the market portfolio has a Sharpe ratio of 0.3, what is the Sharpe ratio of the optimal portfolio? (4 marks)Step by Step Solution
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