Question 1 Stock market Rate and Return (2marks each sub question, total 18 marks, reference MUST be cited in APA style ) Assume that you recently graduated with an MBA degree and have just landed a job as a financial planner with Henrys Investment Inc Your first assignment is to create a portfolio for a client by selecting two stocks on the market You need to complete the below table by selecting ANY two stocks on Nasdaq and collect the data on Dec 31 each year (or the last trading day in that year) Company 1s Name Company 2s Name Nasdaq Composite Includes Dividends Year Stock Price Dividend (paid in the last quarter as of the year) Stock Price Dividend (paid in the last quarter as of the year) 2019 2018 2017 2016 2015 2014 Use the data you have collected to calculate annual returns for Company 1, Company 2, and the Market Index, and then calculate average returns over the five year period Calculate the standard deviation of the returns for Company 1, Company 2, and the Market Index Construct a scatter diagram graph that shows Company 1s and Company 2s returns on the vertical axis and the Market Indexs returns on the horizontal axis Estimate Company 1s and Company 2s betas as the slopes of regression lines with stock returns on the vertical axis (y axis) and market return on the horizontal axis (x axis) Are these betas consistent with your graph You need to determine the risk free rate What is average the long term T bill yield from 2014 to 2019 Assume that the market risk premium is 3 5 What is the expected return on the market Now use the SML equation to calculate the two companies' required returns If you formed a portfolio that consisted of 50 Company 1 stock and 50 Company 2 stock, what would be its beta and its required return Suppose an investor wants to include any one of the two stocks that you recommended in his or her portfolio Stocks A, B, and C are currently in the portfolio, and their betas are 0 769, 0 985, and 1 423, respectively Recommend a stock from the two stocks youve selected to her him and calculate the new portfolios required to return if it consists of 25 of the company youve recommended, 15 of Stock A, 40 of Stock B, and 20 of Stock C If an investor's aversion to risk increased, would the risk premium on a high beta stock increase more or less than that on a low beta stock Explain Question 2 WACC Estimation The balance sheet for Aurora Equipment Implements Inc is provided below along with other selected financial data Balance Sheet as of December 31, 2019 ($ in thousands) Cash $10,500 Accounts payable $31,900 Accounts Receivable 38,000 Short term debt 3,300 Inventory 67,800 Other current liabilities 4,000 Total current assets 116,300 Total current liabilities 39,200 Plant and equipment (gross) 113,900 Long term debt 35,700 Accumulated depreciation 56,900 Plant and equipment (net) 57,000 Shareholders equity Common stock equity 98,400 Total Assets $173,300 Total liabilities and equity $173,300 Short term debt is permanent in nature The company currently pays 6 and short term borrowing costs are not expected to change over the next year Short term debt is valued at par Long term debt is a 12 year 7 5 coupon bond paid semi annually The bond currently trades for 102 of par The company has 25 million shares outstanding with a market price of $11 Based on forecasts, it is anticipated that any new equity capital required will come from internal sources Net income for the most recent year is $20 million, and the companys tax rate is 35 Government 1 year Treasury bills are yielding 3 , while 10 year government bonds yield 5 5 Inflation is currently running at 2 5 The beta of Auroras stock is 1 2, and the market risk premium is 5 Although the company has not paid a dividend on its common stock in the past, the companys new dividend policy calls for dividends to be paid starting next year Dividends will be 40 of earnings, whereas growth in earnings is expected to be 8 per year Based on the above information, calculate Auroras WACC (8 marks) and give your comment on the companys capital structure (4 marks)

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Question 1: Stock market Rate and Return . (2marks each sub-question, total 18 marks, reference MUST be cited in APA style.) Assume that you recently

Question 1: Stock market Rate and Return. (2marks each sub-question, total 18 marks, reference MUST be cited in APA style.)

Assume that you recently graduated with an MBA degree and have just landed a job as a financial planner with Henrys Investment Inc. Your first assignment is to create a portfolio for a client by selecting two stocks on the market.

You need to complete the below table by selecting ANY two stocks on Nasdaq and collect the data on Dec 31 each year (or the last trading day in that year):

	Company 1s Name		Company 2s Name		Nasdaq Composite Includes Dividends
Year	Stock Price	Dividend (paid in the last quarter as of the year)	Stock Price	Dividend (paid in the last quarter as of the year)	Nasdaq Composite Includes Dividends
2019
2018
2017
2016
2015
2014

Use the data you have collected to calculate annual returns for Company 1, Company 2, and the Market Index, and then calculate average returns over the five-year period.
Calculate the standard deviation of the returns for Company 1, Company 2, and the Market Index.
Construct a scatter diagram graph that shows Company 1s and Company 2s returns on the vertical axis and the Market Indexs returns on the horizontal axis.
Estimate Company 1s and Company 2s betas as the slopes of regression lines with stock returns on the vertical axis (y-axis) and market return on the horizontal axis (x-axis). Are these betas consistent with your graph?
You need to determine the risk-free rate. What is average the long-term T-bill yield from 2014 to 2019? Assume that the market risk premium is 3.5%. What is the expected return on the market? Now use the SML equation to calculate the two companies' required returns.
If you formed a portfolio that consisted of 50% Company 1 stock and 50% Company 2 stock, what would be its beta and its required return?
Suppose an investor wants to include any one of the two stocks that you recommended in his or her portfolio. Stocks A, B, and C are currently in the portfolio, and their betas are 0.769, 0.985, and 1.423, respectively. Recommend a stock from the two stocks youve selected to her/him and calculate the new portfolios required to return if it consists of 25% of the company youve recommended, 15% of Stock A, 40% of Stock B, and 20% of Stock C.
If an investor's aversion to risk increased, would the risk premium on a high-beta stock increase more or less than that on a low-beta stock? Explain.

Question 2: WACC Estimation

The balance sheet for Aurora Equipment Implements Inc is provided below along with other selected financial data.

Balance Sheet as of December 31, 2019 ($ in thousands)

Cash	$10,500	Accounts payable	$31,900
Accounts Receivable	38,000	Short-term debt	3,300
Inventory	67,800	Other current liabilities	4,000
Total current assets	116,300	Total current liabilities	39,200

Plant and equipment (gross)	113,900	Long-term debt	35,700
Accumulated depreciation	56,900
Plant and equipment (net)	57,000
		Shareholders equity
		Common stock equity	98,400
Total Assets	$173,300	Total liabilities and equity	$173,300

Short-term debt is permanent in nature. The company currently pays 6% and short-term borrowing costs are not expected to change over the next year. Short-term debt is valued at par.
Long-term debt is a 12-year 7.5% coupon bond paid semi-annually. The bond currently trades for 102% of par.
The company has 25 million shares outstanding with a market price of $11. Based on forecasts, it is anticipated that any new equity capital required will come from internal sources. Net income for the most recent year is $20 million, and the companys tax rate is 35%.
Government 1-year Treasury bills are yielding 3%, while 10-year government bonds yield 5.5%. Inflation is currently running at 2.5%
The beta of Auroras stock is 1.2, and the market risk premium is 5%. Although the company has not paid a dividend on its common stock in the past, the companys new dividend policy calls for dividends to be paid starting next year. Dividends will be 40% of earnings, whereas growth in earnings is expected to be 8% per year.

Based on the above information, calculate Auroras WACC (8 marks) and give your comment on the companys capital structure (4 marks).