The cost of capital of firm A's assets is 11% (this is the cost of capital/expected return that the company’s shares would have if the company were 100% equity financed). The cost of capital for firm B's assets is 15%. Firm A has a 20% debt to equity (D/E) ratio, while firm B has a 40% D/E ratio. Both firms can borrow at a rate of 7%. If an investor holds a portfolio only comprised of shares of these two companies' stock (equity), in what proportions would he/she have to hold these two firms' shares in order to obtain an expected return of 15%? A. Invest 36% in stock A and 64% in stock B B. Invest 50% in stock A and 50% in stock B C. Invest 56% in stock A and 44% in stock B D. Invest 64% in stock A and 36% in stock B E. Invest 0% in stock A and 100% in stock B
Cost of Debt, Cost of Preferred Stock
This article deals with the estimation of the value of capital and its components. we'll find out how to estimate the value of debt, the value of preferred shares , and therefore the cost of common shares . we will also determine the way to compute the load of every cost of the capital component then they're going to estimate the general cost of capital. The cost of capital refers to the return rate that an organization gives to its investors. If an organization doesn’t provide enough return, economic process will decrease the costs of their stock and bonds to revive the balance. A firm’s long-run and short-run financial decisions are linked to every other by the assistance of the firm’s cost of capital.
Cost of Common Stock
Common stock is a type of security/instrument issued to Equity shareholders of the Company. These are commonly known as equity shares in India. It is also called ‘Common equity
The cost of capital of firm A’s assets is 11% (this is the cost of capital/expected return that the
company’s shares would have if the company were 100% equity financed). The cost of capital
for firm B’s assets is 15%. Firm A has a 20% debt to equity (D/E) ratio, while firm B has a 40% D/E
ratio. Both firms can borrow at a rate of 7%. If an investor holds a portfolio only comprised of
shares of these two companies’ stock (equity), in what proportions would he/she have to hold
these two firms’ shares in order to obtain an expected return of 15%?
A. Invest 36% in stock A and 64% in stock B
B. Invest 50% in stock A and 50% in stock B
C. Invest 56% in stock A and 44% in stock B
D. Invest 64% in stock A and 36% in stock B
E. Invest 0% in stock A and 100% in stock B
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