Question 1. (5 marks)Brown Ltd operates outdoor amusement centres in a number of

Question
1. (5 marks)Brown Ltd operates outdoor amusement
centres in a number of country towns. The company has decided to build another
centre that is expected to generate a permanent increase in EBIT of $100000
pa. Current EBIT is $350000. Brown currently has a capital structure that
utilises bonds ordinary equity and preference shares. The $200000 of issued
bonds pay 8% pa. Preference shares pay an annual fixed dividend of $150000.
Currently 250000 ordinary shares have been issued and are trading at $2 per
share. The company pays tax at 30%.a)Brown
needs to raise $500000 to construct the new amusement centre. Assuming the
company can issue new shares at the current market price what is the impact on
EPS if new shares are issued to fund the centre? b)If
new debt can be raised at a 10% interest rate what is the impact on EPS of
using debt rather than a new equity issue?Brown Ltd depends on mainly on sunny
weather to generate its expected EBIT. Using the information above together
with the two following scenarios calculate the impact of the debt and equity
financing alternatives if:a)Weather
is good which will increase attendances and increase EBIT to $600000b)Weather
is poor which will decrease attendances and reduce EBIT to $320000c)Calculate
the indifference point

Question
2. (10 marks)You are considering the following two
stocks for your portfolio and have observed the following.The risk free rate is 0.04 and you are
considering investing 60% of your funds in Stock A and 40% in Stock B.Calculate the following.a)Expected
Return of Stock A (.25 mark)b)Expected
Return of Stock B (.25 mark)c)Standard
Deviation of Stock A (.5 mark)d)Standard
Deviation of Stock B (.5 mark)e)Coefficient
of Variation of Stock A (.25 mark)f)Coefficient
of Variation of Stock B (.25 mark)g)Covariance
of Stocks A and B (.5 mark)h)Correlation
Coefficient of Stocks A and B (.5 mark)i)
Portfolio Return (.25 mark)j)
Portfolio Standard Deviation and
Variance (1.25 mark)k)Weights
of the Minimum Variance Portfolio (1.25 marks)l)
Proof that these weights lead to the
Minimum Variance Portfolio (1 mark)m)Weights
of the Optimal Risky Portfolio with a risk-free asset (1 mark)n)Proof
that these weights lead to the Optimal Risky Portfolio (1.25 marks)o)Discussion
on what you would do with this portfolio (1 mark)