Total 25 marks Question 3 Q3.a. You are working on creating a portfolio that mimics a fully diversified market index. Assume that you have $1 million fund to invest. You plan to allocate $195,000 and $365,000 of your fund to invest in stock A and B, respectively. To achieve your goal, you need to add an additional risky stock C and a risk-free bond to your portfolio. Assume that betas for stock A, B, and Care 0.80, 1.09, and 1.23, respectively. How much would you invest in stock C and risk-free bond? 10 marks Q3.b. You started a biotech company, and you need to raise $65 million. You consider issuing 20-year bonds for this purpose. Assume the required return on your bond issue will be 4.9%, and you're evaluating two alternative issues: (1) a semi-annual coupon paying bond with a coupon rate of 4.9%; and (2) a zero-coupon bond. Assume that the tax rate is 21%. Both bonds will have a par value of $1,000. i. iii. How many of the coupon bonds would you need to issue to raise the $65 million? How many of the zeroes would you need to issue? ii. In 20 years, what will your company's repayment be if you issue the coupon bonds? What if you issue the zeroes? Based in your answers in parts (1) and (2), provide explanations why would you ever want to issue the zeroes? To answer, calculate the firm's after-tax cash outflows for the first year under the two scenarios. Assume the Tax Office's amortization rules apply for the zero-coupon bonds. Hint: (1) For the cash flow of the coupon bonds, we need to account for the tax deductibility of the interest payments. (2) For the zero-coupon bonds, the first-year interest payment is the difference in the price of the zero at the end of the year and the beginning of the year. The total cash flow for the zeroes will be the interest deduction for the year times the number of zeroes sold, times the tax rate.

Solved: Total 25 marks Question 3 Q3.a. You are working on creating a portfoli

Home
questions and answers
total 25 marks question 3 q3 a you are working on creating a portfolio

Question

Total 25 marks Question 3 Q3.a. You are working on creating a portfolio that mimics a fully diversified market index. Assume that you have $1 million fund to invest. You plan to allocate $195,000 and $365,000 of your fund to invest in stock A and B, respectively. To achieve your goal, you need to add an additional risk