Question
The cost of capital of firm As assets is 11% (this is the cost of capital/expected return that the companys shares would have if the
The cost of capital of firm As assets is 11% (this is the cost of capital/expected return that the companys shares would have if the company were 100% equity financed). The cost of capital for firm Bs assets is 15%. Firm A has a 20% debt to equity (D/E) ratio, while firm B has a 40% D/E ratio. Both firms can borrow at a rate of 7%. If an investor holds a portfolio only comprised of shares of these two companies stock (equity), in what proportions would he/she have to hold these two firms shares in order to obtain an expected return of 15%? A. Invest 36% in stock A and 64% in stock B B. Invest 50% in stock A and 50% in stock B C. Invest 56% in stock A and 44% in stock B D. Invest 64% in stock A and 36% in stock B E. Invest 0% in stock A and 100% in stock B
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