Beta of the Portfolio & WACC
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Q1
Lydia wishes to invest $3000 in company A and $7000 in company B. She currently has only $5000 and will borrow the remaining amount to form her two-asset portfolio.
If company A has a beta of 1.01 and company B has a beta of 1.37, what is the beta of her portfolio?
Q2:
RON Ltd has the following capital structure components.
Five million shares issued with a current market price of 8. Equity holders require a 14% 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).
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Solution Summary
The solution computes Beta of the Portfolio and WACC with given data.
Solution Preview
Q1. The portforlio beta is the weighted sum of the individual betas.
Beta of Portfolio = 1.01 * 3000/10000 + 1.37 * 7000/10000
= 1.01*0.30 + ...
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