3. The beta of stock Golden is 1.25. The risk free rate of interest is 2.5% and
ID: 2765288 • Letter: 3
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