19. Your portfolio has a beta of 1.12. The portfolio consists of 40 percent U.S.

Question

19. Your portfolio has a beta of 1.12. The portfolio consists of 40 percent U.S. Treasury bills 30 percent stock A, and 30 percent stock B. Stock A has a risk-level equivalent to that of the overall market. What is the beta of stock B:? A. 1.47 B. 1.52 C. 1.69 D. 1.84 E. 2.73 20. Incorporating flotation costs into the analysis of a project will: A. cause the project to be improperly evaluated B. increase the net present value of the project. C. increase the project's rate of return D. increase the initial cash outflow of the project. E. have no effect on the present value of the project 21. Sweet Treats common stock is currently priced at S18.53 share. The company ?ost paid S1.25 per share as its annual dividend. The dividends have been increasing by 2.5 percent annualy and are expected to continue doing the same. What is this firm's cost of eqnityt A. 6.03 percent B. 6.18 percent C. 8.47 percent D. 9.41 percent E. 9.82 percent 22. Morris Industries has a eapital structure of 55 percent common stoek, 10 percent preferred stock, and 45 percent debt. The firm has a 60 percent dividend payout ratio, a of 0.89, and a tax rate of 38 percent. Given this, which one of the following statements is correct? A. The aftertax cost of debt will be greater than the current yield-to-maturity on the firm's B. The firm's cost of preferred is most likely less than the firm's actual cost of debt. C. The firm's cost of equity is unaffected by a change in the firm's tax rate. D. The cost of equity can only be estimated using the SML approach E. The firm's weighted average cost of capital will remain constant as long as the cap remains constant.

Explanation / Answer

(19) Treasury Bill is assumed to be risk-free as it is backed and guaranteed by the Federal Government. Stock A is said to have risk level equivalent to the overall market. If the overall market is considered the benchmark portfolio (against which beta is calculated), then Stock A will have a beta of 1 (as its risk level is equivalent to the benchmark portfolio). Portfolio Beta = 1.12

Let stock B's bet be B

Weight of A = 0.3, Weight of B = 0.3 and Weight of T-Bills = 0.4

T-Bills have beta equal to zero on account of being risk-free.

Therefore, 0.4 x 0 + 0.3 x 1 + 0.3 x B = 1.12

B = (0.82 / 0.3) = 2.73

Hence, the correct option is (E).

NOTE: Please raise separate queries for solutions to the remaining unrelated questions.

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