# Assignment

Computing Skills Assignment Help

Rating:

Question 1

i)             E(Rp) = (0.2) (0.14) + (0.8) (0.2) = 0.188

Variance ( 2) = (0.2)2 (0.0225) + (0.8)2 (0.0576) + 2 (0.2) (0.8) (0.8) (0.15) (0.24)

=  0.0009 + 0.036864 + 0.009216

=  0.04698

Standard deviation ( ) = (0.04698)1/2 = 0.21675

ii)           The security market line (SML) reflects the required return on an asset i for each level of systematic risk (or the beta). The market beta is one and the slope of SML is the risk premium of the market portfolio.

The SML provides a benchmark for the evaluation of investment performance and “fairly priced” assets plot on the SML. If a stock is underpriced, it is above the SML and overpriced stocks plot below the SML.

iii)         Beta = 0.8(0.15)(0.24)/0.0576 = 0.5 E(RX) = 6% + 0.5 (20% - 6%) = 13.0%

Share X is underpriced so its share price is expected to rise.

iv)         If investors become more risk-averse, the SML originates from the risk-free rate of return will become steeper.

The new SML with steeper slope indicates a high risk premium for Share A, and hence Share X’s required rate of return will increase.

Question 2 – Miller Ltd

Mortgage loan:

PV = -\$600,000           n = 10×12         PMT = \$10,000

i = 1.322%

Effective annual rate = (1 + 0.01322)12 – 1 = 17.0698%

After-tax cost = 17.0698% (1  0.3) = 11.9489%

MV = \$ 600,000

Debentures:

PMT = -10%×\$500/2 i = 8%/2 n = 7×2 FV = -\$500 PV = \$552.8156

Effective annual rate = (1 + 0.08/2)2 – 1 = 8.16%

After-tax cost = 8.16% (1 – 0.3) = 5.712%

MV = \$552.8156 × 1,600 = \$884,505

Preference shares:

rp = (8% × 1,000)/998 = 8.016%

MV = \$1,000 × 500 = \$500,000

Ordinary shares: -

re = 1.40/16.5 + 0.04 = 12.4848%

MV = \$16.50 × 200,000 = \$3,300,000

 Cost of Capital Market value Proportion Cost After-tax Wt Cost Mortgage loan 600,000 0.1135 17.070% 11.9489% 1.3562% 10% Debentures 884,505 0.1674 8.160% 5.7120% 0.9562% 8% preference shares 500,000 0.0946 8.016% 0.7583% Ordinary shares 3,300,000 0.6245 12.485% 7.7968% 5,284,505 1.0000 10.8675%

Question 3 – Hayden Ltd

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