Question

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Kim's Bridal Shoppe has 11,000 shares of common stock outstanding at a price of $44 per...

Kim's Bridal Shoppe has 11,000 shares of common stock outstanding at a price of $44 per share. It also has 255 shares of preferred stock outstanding at a price of $86 per share. There are 600 bonds outstanding that have a coupon rate of 6.3 percent paid semiannually. The bonds mature in 25 years, have a face value of $1,000, and sell at 106 percent of par. What is the capital structure weight of the common stock? .4238 .5063 .5570 .3751 .4376

15. You decide to invest in a portfolio consisting of 25 percent Stock A, 25 percent Stock B, and the remainder in Stock C. Based on the following information, what is the expected return of your portfolio?

State of Economy	Probability		Return if State Occurs
		Stock A	Stock B	Stock C
Recession	.16	-16.4	-2.71	-21.6
Normal	.55	12.6	7.3	15.9
Boom	.29	26.2	14.6	30.5

Answers to choose from:

15.47%

13.09%

14.18%

12.54%

12.00%

Expert Solution

First question:

Component	Price	Number	Market Value
	P	N	P x N
Common stock	44	11,000	484,000
Preferred stock	86	255	21,930
Bond	1,060	600	636,000
Total			1,141,930

the capital structure weight of the common stock = Market value of common stock / Total market value = 484,000 / 1,141,930 = 0.4238

Hence the first option is correct.

Second Question:

		Rate of Return If State Occurs
State of	Probability of	Stock A	Stock B	Stock C	Portfolio
Economy	State of Economy
	Pi	Rai	Rbi	Rci	Rpi = 0.25Rai + 0.25Rbi + 0.50Rci
Boom	0.16	-16.40%	-2.71%	-21.60%	-15.58%
Normal	0.55	12.60%	7.30%	15.90%	12.93%
Bust	0.29	26.20%	14.60%	30.50%	25.45%

Expected return = sum of (Pi x Rpi) = 0.16 x (-15.58%) + 0.55 x 12.93% + 0.29 x 25.45% = 12.00%

Hence the correct answer is the last option showing 12.00%

jeff jeffy answered 3 years ago

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