A delivery company would like to capitalise on its recent success and expand into a new geographic area after having a very successful two years.

The company does not have enough cash to fund this expansion and is seeking external finance. One of the directors has been advised to think about issuing some preference shares since she will be able to maintain control over her company.

Suggest at least three other ways in which the business may raise external finance outlining advantages and disadvantages of each.

Recommend your preferred option giving reasons.

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You have observed the following returns over time: Year Stock X Stock Y Market 2006 14% 13% 12% 2007 19 7 10 2008 -16 -5 -12 2009 1 1 2010 20 11 15 Assume that the risk-free rate is 6% and the market risk premium is 5%. a. What are the betas of Stocks X and Y? b. What are the required rates of return on Stocks X and Y? c. What is the required rate of return on a portfolio consisting of 80% of Stock X and 20% of Stock Y? d. If Stock X's expected return is 22%, is Stock X under- or overvalued? You have observed the following returns over time: Year Stock X Stock Y Market 2006 14% 13% 12% 2007 19 7 10 2008 -16 -5 -12 2009 1 1 2010 20 11 15 Assume that the risk-free rate is 6% and the market risk premium is 5%. a. What are the betas of Stocks X and Y? b. What are the required rates of return on Stocks X and Y? c. What is the required rate of return on a portfolio consisting of 80% of Stock X and 20% of Stock Y? d. If Stock X's expected return is 22%, is Stock X under- or overvalued?

Answer rating: 100% (QA)

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