University Name: Fundamentals of Business Finance Homework Solution

This document provides a comprehensive solution to a business finance assignment, addressing various aspects of financial analysis and investment management. It includes detailed answers to questions on rate of return, standard deviation, coefficient of variation, and portfolio analysis. The solution calculates portfolio returns, betas, and analyzes the cost of debt, preferred stock, and common stock equity. Furthermore, it covers the weighted average cost of capital (WACC) calculation, offering a complete understanding of the topics. The assignment incorporates real-world scenarios and financial calculations, providing a practical application of theoretical concepts. The document also includes bibliographies, which provides a list of resources used for the assignment. This solution is designed to aid students in understanding and mastering key financial concepts.

Running head: FUNDAMENTALS OF BUSINESS FINANCE
Fundamentals of Business Finance
Name of the Student:
Name of the University:
Author’s Note:
Course ID:

1FUNDAMENTALS OF BUSINESS FINANCE
Table of Contents
Question 8-9: Rate of return, standard deviation and coefficient of variation................................3
Answer to Part a:.........................................................................................................................3
Answer to Part b:.........................................................................................................................3
Answer to Part c:.........................................................................................................................3
Answer to Part d:.........................................................................................................................4
Answer to Part e:.........................................................................................................................4
Question 8-14: Portfolio analysis....................................................................................................4
Answer to Part a:.........................................................................................................................4
Answer to Part b:.........................................................................................................................5
Answer to Part c:.........................................................................................................................6
Answer to Part d:.........................................................................................................................6
Question 8-27: Portfolio return and beta.........................................................................................7
Answer to Part a:.........................................................................................................................7
Answer to Part b:.........................................................................................................................7
Answer to Part c:.........................................................................................................................7
Answer to Part d:.........................................................................................................................7
Answer to Part e:.........................................................................................................................8
Question 9-5: The cost of debt.........................................................................................................8

2FUNDAMENTALS OF BUSINESS FINANCE
Question 9-7: Cost of preferred stock............................................................................................10
Answer to Part a:.......................................................................................................................10
Answer to Part b:.......................................................................................................................10
Question 9-9:.................................................................................................................................10
Answer to Part a:.......................................................................................................................10
Answer to Part b:.......................................................................................................................11
Answer to Part c:.......................................................................................................................11
Question 9-10: Cost of common stock equity...............................................................................11
Answer to Part a:.......................................................................................................................11
Answer to Part b:.......................................................................................................................11
Answer to Part c:.......................................................................................................................12
Answer to Part d:.......................................................................................................................12
Question 9-17: Calculation of individual costs and WACC..........................................................12
Answer to Part a:.......................................................................................................................12
Answer to Part b:.......................................................................................................................13
Answer to Part c:.......................................................................................................................13
Answer to Part d:.......................................................................................................................13
Bibliographies:...............................................................................................................................14

3FUNDAMENTALS OF BUSINESS FINANCE
Question 8-9: Rate of return, standard deviation and coefficient of variation
Answer to Part a:
Answer to Part b:
The average rate of return is obtained as 72.31%.
Answer to Part c:

4FUNDAMENTALS OF BUSINESS FINANCE
Answer to Part d:
Answer to Part e:
Coefficient of variation helps in gauging the volatility of expected return on investment.
It is used to compare the degree of variation of different data series. Therefore, a lower
coefficient of variation would ensure favorable return with lower risk. According to the provided
information, Mike only includes securities in his portfolio, which have coefficient of variations
below 0.90. Hence, M would not include the stock of Hi-Tech Inc, as its coefficient of variation
is 1.04, which is well above 0.90.
Question 8-14: Portfolio analysis
Answer to Part a:

5FUNDAMENTALS OF BUSINESS FINANCE
Answer to Part b:

6FUNDAMENTALS OF BUSINESS FINANCE
Answer to Part c:
Answer to Part d:
From the above tables, Investment Alternative 2 is recommended since it has both zero
standard deviation and coefficient of variation. This implies that the portfolio would provide
16.50% returns over the four-year period.

7FUNDAMENTALS OF BUSINESS FINANCE
Question 8-27: Portfolio return and beta
Answer to Part a:
Answer to Part b:
Answer to Part c:
Answer to Part d:

8FUNDAMENTALS OF BUSINESS FINANCE
Answer to Part e:
The returns on Assets C and D have exceeded the expected return of CAPM; however,
the other two Assets A and B fail to meet the expectations. This underperformance could be due
to the unsystematic factor, which would cause the firm to perform effectively as expected.
Question 9-5: The cost of debt

9FUNDAMENTALS OF BUSINESS FINANCE

10FUNDAMENTALS OF BUSINESS FINANCE
Question 9-7: Cost of preferred stock
Answer to Part a:
Answer to Part b:
Question 9-9:
Answer to Part a:

11FUNDAMENTALS OF BUSINESS FINANCE
Answer to Part b:
Answer to Part c:
Question 9-10: Cost of common stock equity
Answer to Part a:
Answer to Part b:
The net proceeds would be $52, as the organization expects the stock price of $52 after
floatation and under pricing costs.