the plz help me find answers for the two questions 8. The following data relate

Question

the

plz help me find answers for the two questions

8. The following data relate to the investment portfolio of Jaqueline Morris Security Amount invested Expected Return Beta Stock A Stock B Stock C Stock D Stock E $90,000 $75,000 $60,000 $45,000 $30,000 9% 11% 14% 16% 18% 0.7 1.0 1.2 1.5 1.7 Estimate the expected return on this portfolio? Estimate the beta of this portfolio? Does this portfolio have more or less systematic risk than average asset? (5 Marks) 9. A firm has $150 million in equity and $350 million in debt. The firm recently issued bonds at the market required rate of 10%. The firm's beta is 1.2, the risk-free rate is 5%, and the expected return in the market is 15%. Assume the firm is at their optimal capital structure and the firm's tax rate is 30%. what is the firm's weighted average cost of capital (WACC)? (5 Marks)

Explanation / Answer

Answer to Question 8:

Total Value of Investment = $90,000 + $75,000 + $60,000 + $45,000 + $30,000
Total Value of Investment = $300,000

Weight of Stock A = 90,000 / 300,000 = 0.30
Weight of Stock B = 75,000 / 300,000 = 0.25
Weight of Stock C = 60,000 / 300,000 = 0.20         
Weight of Stock D = 45,000 / 300,000 = 0.15
Weight of Stock E = 30,000 / 300,000 = 0.10

Expected Return of Portfolio = (0.30 * 0.09) + (0.25 * 0.11) + (0.20 * 0.14) + (0.15 * 0.16) + (0.10 * 0.18)
Expected Return of Portfolio = 0.027 + 0.0275 + 0.028 + 0.024 + 0.018
Expected Return of Portfolio = 0.1245
or Expected Return of Portfolio =12.45%

Beta of the Portfolio = (0.30 * 0.7) + (0.25 * 1.0) + (0.20 * 1.2) + (0.15 * 1.5) + (0.10 * 1.7)
Beta of the Portfolio = 0.21 + 0.25 + 0.24 + 0.225 + 0.17
Beta of the Portfolio = 1.095

The portfolio has more systematic risk, as the Beta of Portfolio is more than 1.

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