3. The beta of stock Golden is 1.25. The risk free rate of interest is 2.5% and

Question

3. The beta of stock Golden is 1.25. The risk free rate of interest is 2.5% and the expected return on the market is 10%. According to the capital asset pricing model, which of the following comes closest to the expected return of Golden?

A. 12.37%

B. 13.12%

C. 14.25%

D. 11.88%

4. Western Electric has 23,000 shares of common stock outstanding at a price per share of $57 and a rate of return of 14.2 percent. The firm has 6,000 shares of 7 percent preferred stock outstanding at a price of $48 a share. The preferred stock has a par value of $100. The company also has 350 corporate bonds, each with $1000 par value, and the bond currently sells for 102 percent of face. The yield-to-maturity on the debt is 8.49 percent.

What is the capital structure weight of the firm's common stock?

75.36%

55.25%

48.16%

67.02%

PLEASE ANSWER ALL QUESTIONS

A.

75.36%

B.

55.25%

C.

48.16%

D.

67.02%

Explanation / Answer

Answer to the Point no.(3).

Required rate of return=R(f)+Beta*(R(m)-R(f))

=2.5%+1.25*(10%-2.5%)

   =2.5%+(1.25*7.5%)

   =2.5+9.375%

   =11.88%

According to the capital asset pricing model, D is the Correct answer(11.88%).

Answer to point no.(2)

Weight of common stock 80%.

Capital Structure Quantity Market Price Market Value Weight Common stock               23,000                 57          1,311,000              0.802 Preferred stock                 6,000                 48             288,000              0.176 Debt                    350               102              35,700              0.022 TOTAL          1,634,700

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