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Question no 2 9marks consider the following

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Question No 2 (9marks)Consider the following information:State of theEconomyProbabilityReturn of the MarketPortfolioReturn of Stock XYZGood40%8%Very Good60%14%You have invested 30% of your savings in the risk-free asset, 30% in stock XYZ, and 40% in themarket portfolio.What is the beta of your portfolio that includes the three assets?12%16%
Question No 3 (11 marks)You are given the task of calculating the cost of capital of Kingston Toys.The company faces atax rate of 40%.The company has 100,000 common shares and 10,000 preferred sharesoutstanding.Each preferred share has a par value of $60, and is currently selling at $54.Thepreferred shares are paying dividends that total 5% of the Par value.You estimate that the betaof the common stock is 1.5.The equity market risk premium is estimated to be 5%, and the risk-free rate is 5%.You decide to employ the CAPM approach to calculate the cost of equity. Thestock sells at $39.03 per share.The company has one debt issue that is outstanding.The issue consists of 1,000 semi-annualcoupon bonds.Each bond has a face value of $1000.The annual coupon rate is 10%, and thebonds are currently trading at a YTM that equals 12%.The bonds will mature 10 years fromnow.Using the information provided above, calculate the weighted average cost of capital of KingstonToys.

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