Skyline University College MBA Program Class Participation- 10 marks Financial M

Question

Skyline University College MBA Program Class Participation- 10 marks Financial Management-Fall 2017 yeur answers and show all the calculations Notec write the Formula for all Question 1s(S marks Consider the Rellowing information about three stocks State ofPrebability of State Rate of Return if State Occurs Stock BOSS 0.55 of Eeonomy StockA Boom Normal Bust 035 0.50 0.15 0.36 0.13 0.09 0.17 0.00 0.45 I. If your portfolio is invested 40 percent each in stock A and B and 20 percent in stock C calculate the following: a. The portfolio expected return? b. The portfolio Standard Deviation If the expected T-bill (risk free) rate is 3.8 percent, what is the expected risk premium on the portfolio? 2. Question 2: (5 marks) Given the following information for Even-flow Power Co Debt 8,000 6.5 percent coupon bonds outstanding. $1,000 par value, 20 years to maturity, selling for 92 percent of par, the bonds make semiannual payments Common Stock 250,000 shares outstanding, selling for $27 per share, the beta is 1.05. Preferred Stock: 15,000 shares of 5 percent preferred stock outstanding, currently selling for $93 per share Market: 8 percent market risk premium and 4.5 percent risk-free rate. Calculate the Weighted Average Cost of Capital (WACC), assuming the company's tax rate is 35 percent.

Explanation / Answer

Expected return is the weighted average of individual returns:

Expected return in Boom = 0.4*0.24 + 0.4*0.36 + 0.2*0.55 = 0.3500

Expected return in Normal = 0.4*0.17 + 0.4*0.13 + 0.2*0.09 = 0.1380

Expected return in Bust = 0.4*0 + 0.4*-0.28 + 0.2*-0.45 = -0.2020

Expected return = 0.35*0.35+0.5*0.1380+0.15*-0.2020 = 0.1612 = 16.12%

Standard deviation - Standard deviation is the square root of sum of squared deviation from the mean times the probability:

Std dev = [0.35*(0.35-0.1612)^2 + 0.5*(0.1380-0.1612)^2 + 0.15*(-0.2020-0.1612)^2]^(1/2) = 0.1804 = 18.04%

2.

Risk premium = Expected return - risk free rate = 0.1612 - 0.038 = 0.1232 = 12.32%

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