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AMA International University BAHRAIN College of Administrative and Financial Sciences Bachelor of Science in Business Informatics 1 st Trimester, AY 2017-2018 Part 1 Investment with a beta, b, of 1.70. The risk-free rate of return, RF, is 8%, The return on the market portfolio ofassets, rm, is 12%. This investment will earn an annual rate of return of 13%. Requirement what would you expect to happen to the investment's return? a. If the return on the market portfolio were to increase by 9%, b, if the market return were to decline by 9%? b. use capital asset pricing model (CAPM) is used to find the required return on this investment, discuss the result? Why or why not? drops by 2% to 7%. What impact would this change have on your responses in c. the basis of your calculation in part b, would you recommend this investment? d. Assume that as a result of investors becoming less risk-averse, the market return parts b and c? part 2 Arab United Company has compiled the information shown in the following table. Source of Book value Market value After tax cost 6% 13.0 17.0 capital Long term debt Preferred stock Common dtock Total 8000000 80000 21200000 10200000 7680000 120000 6000000 Required: a. using book value weights and the market value weights. Calculate the weighted average cost of capital b. Compare your answers obtained in parts a, determine what is the preferred approach and make an in-depth analysis why you prefer this approach

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