RON Ltd has the following capital structure components. Five million shares issu
ID: 2633053 • Letter: R
Question
RON Ltd has the following capital structure components.
Five million shares issued with a current market price of 5. Equity holders require a 13% return.
10,000, 6%, $1000 Corporate bonds outstanding which are currently priced at par. Coupons are paid annually.
If the firm faces a corporate tax rate of 30%, compute RON Ltd's Weighted Average Cost of Capital (WACC). Enter your answer in decimal form to FOUR decimal places. For example 10.34%, would be entered as 0.1034.____________
Assume that the economy has three types of people. 20% are fad followers, 75% are passive investors, and 5% are informed traders. The portfolio consisting of all informed traders has a beta of 1.4 and an alpha of 4.98%. The market has an expected return of 10% and the risk-free rate is 4 %.
What is the alpha for the fad followers? Enter your answer as a percentage to two decimal places (i.e. 0.12% rather than 0.0012; the percent sign is not necessary)._____________
Which of the following statements is FALSE?
The largest alphas occur in the smallest size deciles.
When considering portfolios formed based on the market-to-book ratio, most of the portfolios plot below the security market line.
The size effect is the observation that small stocks have positive alphas.
When considering portfolios formed based on size, although the portfolios with the higher betas yield higher returns, most size portfolios plot above the security market line.
The largest alphas occur in the smallest size deciles.
When considering portfolios formed based on the market-to-book ratio, most of the portfolios plot below the security market line.
The size effect is the observation that small stocks have positive alphas.
When considering portfolios formed based on size, although the portfolios with the higher betas yield higher returns, most size portfolios plot above the security market line.
Explanation / Answer
Debt - 10.0 mil at 6%, less 30% tax, or 4.2% = 420,000 Annual Interest
Equity - Market value 25.0 Mil at 10% = 2.5 Mil Annual Return to shareholders
WACC
Cost - 420,000 + 2.5 mil = 2,920,000
Capital - 10.0 mil + 25.0 mil = 35.0 mil
WACC = 2.920 mil / 35.0 mil = 8.34%
OR
Debt - 10 / 35 = 28.57% costs 4.2%, or 1.2%
Equity - 71.43% costs 10%, or 7.14% .Total 8.34%
3.)Answer: B
Explanation: When considering portfolios formed based on the market-to-book ratio, most of the
portfolios plot above the security market line.
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