1) The correlation coefficient between well diversified portfolio A (50 different assets) and well diversified portfolio B (50 different assets) is= 7.
A new portfolio of A and B together will be less risky than the portfolio which is composed of either just assets in portfolio A or just assets in portfolio B. True or false?
2 ) XYZ Inc. has the optimal capital structure as follows:
Debt $ 45 million
Common Equity $ 90 million
You can sell 30 year, $ 1000 face value, 6% coupon bonds at par.
Next dividend will be= $ 1.50; and shares trade at= $ 50. The firm’s growth rate is= 10% and the tax rate is= 30%.
a) find out WACC.
b) find out WACC if you believe the capital structure of 40% debt and rest equity is more optimal
c) In 140 characters or less: Describe why do you find out the cost of capital?