Financial Management

Answer NO. 1

1. Beta of ABCD corp is weighted avge of individual investments.
Weighted avge for Tshirt is 100,000/1,000,000=0.1 & so on
So Beta = 0.1*1.5 + 0.2*(-0.5) + 0.3*1.25+0.4*0.75 = 0.725

2. ABCD Reqd rate of Return Ks=Krf+RPm*Beta = 0.06+0.05*0.725 = 9.625%

3. Children garments will be 500,000, Tshirt is 100,000, Jacket is 200,000 & Pants is 200,000
Revised Beta will be 0.1*1.5 + 0.2*(-0.5) + 0.5*1.25+0.2*0.75 = 0.825
Revised ABCD Reqd rate of Return Ks=Krf+RPm*Beta = 0.06+0.05*0.825 = 10.125%

Answer NO. 2


1. Cost of prefered stock Kp=D1/P0 (Prefered) = 15/97% = 15.46%

2. Cost of common equity Ks=D1/P0 +g (Common Eq) = 4/60%+10%=16.67%

3. Cost of Debt Kd=13%

4. WACC = WdKd(1-T) + WpKp + WsKs
Putting values, we get
WACC = 0.2*0.13*(1-0.35) + 0.20*0.1546 + 0.6*0.1667 = 0.1478 = 14.78%

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