QUESTION TWO (2) Attempt All a) Merlo, Inc maintains a debt-equity ratio of 40 and follows a residual dividend policy The company has after-tax earnings of $1,600 for the year and needs $1,400 for new investments. What is the total amount Merlo will pay out in dividends this year? ( 3 Marks) b) You recently purchased a stock that is expected to earn 12 % in a booming economy, 8 % in a normal economy and lose 5% in a recessionary economy. There is a 15 % probability of a boom, a 75 % chance of a normal economy, and a 10 % chance of a recession. What is your expected rate of return on this stock? ( 3 Marks) c) Shares are currently selling for $4 4625. At the beginning of the year you bought them for $425 and during the year a dividend of 21 25 cents per share was paid What is the return? ( 3 Marks) d) Which one of the following stocks is correctly priced if the risk-free rate of returns 2.5 percent and the market risk premium is 8 percent? ( 3 Marks) STOCK BETA EXPECTED RETURN 82% 13.9% 11.8% 12.6% 97% B 68 142 1 23 131 94 C D e) Using the following information, calculate the portfolio beta and expected return Wealth Event Expected Beta Invested Return A K10,000 8% 80 K20,000 12% 95 K30,000 15% 1.10 K40,000 18% 1.40 ( 3 Marks) TOTAL 30 MARKS TOTAL PAPER 70 MARKS