Holooly Plus Logo
Holooly Plus Logo

Question 8.A.5: Can you recall the difference between the two types of risk?

Can you recall the difference between the two types of risk?

The blue check mark means that this solution has been answered and checked by an expert. This guarantees that the final answer is accurate.
Learn more on how we answer questions.

Diversifiable risk is that part of the risk that is specific to the investment project and which can be eliminated by spreading available funds among investment projects. Non-diversifiable risk is that part of total risk that is common to all projects and which therefore cannot be diversified away. It arises from general market conditions and can be avoided only by making risk-free investments.

Related Answered Questions

Question: 8.2

Danton plc has 10 million ordinary shares in issue with a current market value of £2.00 per share. The expected dividend for next year is 16p per share and this is expected to grow each year at a constant rate of 4 per cent. The business also has: ■ 10.0 million 9 per cent £1 irredeemable ...

Verified Answer:

The first step is to calculate the cost of the ind...
Question: 8.A.12

Iordanova plc has 12 per cent irredeemable preference shares in issue with a nominal (par) value of £1. The shares have a current market price of £0.90 (excluding dividends). What is the cost of these shares? ...

Verified Answer:

The cost is: K_{p} = \frac{D_{p}}{P_{p}}[/l...
Question: 8.A.11

Calculate the pre-tax cost of loan capital for Lim Associates plc. (Hint: Start with a discount rate of 10 per cent.) ...

Verified Answer:

Using a discount rate of 10 per cent, the NPV is c...
Question: 8.1

Lim Associates plc issues £20 million loan capital on which it pays an annual rate of interest of 10 per cent on the nominal value. The issue price of the loan capital is £88 per £100 nominal value and the tax rate is 20 per cent. The loan capital is due to be redeemed in four years’ time at its ...

Verified Answer:

The cash flows for this issue of loan capital will...
Question: 8.A.10

Tan and Co plc has irredeemable loan capital outstanding on which it pays an annual rate of interest of 10 per cent. The current market value of the loan capital is £88 per £100 nominal value and the tax rate is 20 per cent. What is the cost of the loan capital to the business? ...

Verified Answer:

Using the above formula, the cost is: K_{d}...
Question: 8.A.9

Can you recall why this is the case? ...

Verified Answer:

If earnings are reinvested by the business, the sh...
Question: 8.A.8

Why do you think this is? ...

Verified Answer:

In the absence of information concerning returns t...
Question: 8.A.7

Lansbury plc has recently obtained a measure of its beta from a business information agency. The beta value obtained is 1.2. The expected returns to the market for the next period is 10 per cent and the risk-free rate on government securities is 3 per cent. What is the cost of ordinary shares to ...

Verified Answer:

Using the CAPM formula we have: K0 = KRF + b(Km - ...
Question: 8.A.6

Would it be better to hold shares with a beta value of more than 1.0 or less than 1.0 when stock market prices are generally (a) rising (b) falling? ...

Verified Answer:

When stock market prices are rising, it is better ...
Question: 8.A.4

Avalon plc has ordinary shares in issue that have a current market price of £1.50. The dividend expected for next year is 20p per share and future dividends are expected to grow at a constant rate of 3 per cent a year. What is the cost of the ordinary shares to the business? ...

Verified Answer:

The cost is: K_{0} = \frac{D_{1}}{P_{0}} + ...