Faris currently has a capital structure of 40 percent debt and 60 percent equity
ID: 2702275 • Letter: F
Question
Faris currently has a capital structure of 40 percent debt and 60 percent equity, but is considering a new product that will be size="2">
produced and marketed by a separate division. The new division will have a capital structure of 70 percent debt and 30 percentsize="2">
equity. Faris has a current beta of 1.1, but is not sure what the beta for the new division will be. AMX is a firm that produces size="2">
a product similar to the product under consideration by Faris. AMX has a beta of 1.6, a capital structure of 40 percent debt and 60 percent equity and a marginal tax rate of 40 percent. Faris' tax rate is 40 percent. What will be Faris' weighted cost of capital for this new division if the after-tax cost of debt is 7 percent, the risk-free rate is 8 percent, and the market risk premium is 5 percent? size="2">
12.15%
11.41%
18.15%
14.27%size="2">for="multiplechoice7_0_4">name="studentnumericanswer[6].numericanswer[0].choicenumber" id="multiplechoice7_0_4" type="radio" value="4">size="2">for="multiplechoice7_0_3">name="studentnumericanswer[6].numericanswer[0].choicenumber" id="multiplechoice7_0_3" type="radio" value="3">size="2">for="multiplechoice7_0_2">name="studentnumericanswer[6].numericanswer[0].choicenumber" id="multiplechoice7_0_2" type="radio" value="2">size="2">for="multiplechoice7_0_1">name="studentnumericanswer[6].numericanswer[0].choicenumber" id="multiplechoice7_0_1" type="radio" value="1">
An investor plans to invest 55 percent of her funds in the common stock of A&M Company and 45 percent in UT Company. size="2">
The expected return on A&M is 16 percent and the expected return on UT is 12 percent. size="2">
The standard deviation of returns for A&M is 25 percent and for UT is 15 percent. size="2">
The correlation between the returns for A&M and UT is -0.8 (negative 0.8) .size="2">
Determine the standard deviation of returns for this investor's portfolio. size="2">
0.86%
9.28%
1.39 %size="2">for="multiplechoice9_0_3">name="studentnumericanswer[8].numericanswer[0].choicenumber" id="multiplechoice9_0_3" type="radio" value="3">size="2">for="multiplechoice9_0_2">name="studentnumericanswer[8].numericanswer[0].choicenumber" id="multiplechoice9_0_2" type="radio" value="2">size="2">for="multiplechoice9_0_1">name="studentnumericanswer[8].numericanswer[0].choicenumber" id="multiplechoice9_0_1" type="radio" value="1">
11.78%
size="2">
for="multiplechoice7_0_4">
Explanation / Answer
1. 12.15%
2. 9.28%
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