You have $375,000 to invest in a share portfolio. Your choices are as follows: Invest in FTV with an expected return of 14.25%. Invest in

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You have $375,000 to invest in a share portfolio. Your choices are as follows:

Invest in FTV with an expected return of 14.25%.

Invest in FHL with an expected return of 8.7%.

FTV has a beta of 1.58.

FHL has a beta of 0.75.

Your goal is to calculate a portfolio with the same risk as the market.

Required:

a. Calculate the weights of each asset in your portfolio. (4m)

b. Based on your answer from (a) above, calculate the expected return of your portfolio. (3m)

c. Based on your answer from (a & b) above, calculate the dollar amounts that you will invest in

FTV and FHL respectively according to your portfolio. (3m)

Question 2 (10 marks) (Please Show all working clearly. Round off answers to 2d.p.)

Ben's Trading Ltd. is a successful SME dalo exporter and the company has been growing. The

company has recently been working on its capital structure so it can finance its' business growth

sustainably. With the help of the accountant, the company has set a target capital structure of

40% ordinary shares, 20% preference shares and the balance as debt finance. Ben's ordinary

shareholders expect 15% return, the preference shareholders are expecting 7% return and the cost

of debt is estimated at 8%. The relevant tax rate is 20%.

a. Calculate the company's WACC under a classical tax system? (4m)

b. After Ben, the owner and managing director of Ben's Trading, reviewed the proposed capital

structure, he asked his accountant why they are proposing more debt finance compared to

preference shares since the cost of debt is higher than the cost of preference shares. How will the

accountant respond to Ben's query? Justify your answer with calculations. (3m)

c. Ben is further considering to diversify his portfolio by investing some of his profits in two of

the listed companies on SPSE. The companies are KFL (Kontiki Finance Ltd.) and RBG (RB

Patel Group Ltd.). After studying the stock market, he gathers the following information:

KFL shares have a beta of 1.8 and an expected return of 25.02%.

RBG shares have a beta of 2.1 and an expected return of 32.38%.

The risk-free rate is 1.33% and the market premium is 14.3%.

Explain to Ben if the shares of both companies are correctly priced. (3m)